UNIVERSITY  of  CAUFORNU 

AT 

LOS  ANGELES 

UBRAKY 


PRINCIPLES  OF 
TAXATION 


BY 

HASTINGS  LYON 

Cmmselor-at-Law 

Visiting  Professor  of  Fitiance,  The  Tuck  School 

Dartmouth  College 

Author  of '■^  Capitalization:  a  Book  on 

Corporation  Finance  " 


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BOSTON    NEW  YORK    CHICAGO 
HOUGHTON   MIFFLIN  COMPANY 


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COPYRIGHT,    I914,   BY  W.   HASTINGS  LYON 
ALL  RIGHTS  RESERVED 


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PREFACE 

As  Counsel  to  Committees  for  the  Investment 
Bankers'  Association  of  America  it  became  my 
duty  to  examine  and  report  on  many  tax  meas- 
ures introduced  in  the  various  legislatures,  and 
occasionally  to  appear  before  a  legislative  com- 
mittee on  account  of  such  measures.  Facing  the 
problem  of  these  bills,  anticipating  that  of  other 
bills  in  future  legislative  sessions,  and  desiring,  if 
possible,  to  reach,  on  behalf  of  the  investment 
banking  business,  some  definite  conclusions  as  to 
what  is  fair  in  the  taxation  of  securities,  the  Tax 
Committee  of  the  Association  requested  me  to 
present  to  it  a  brief  statement  of  principles  of 
taxation,  to  show  the  position  which  securities 
occupy  in  a  fair  scheme  of  taxation,  and  to  afford 
a  basis  for  working  out  practicable  proposals  as 
to  what  should  be  done  in  the  taxation  of  securi- 
ties. The  Honorable  F.  W.  Rollins,  of  Boston,  is 
Chairman  of  the  Committee,  and  the  other  mem- 
bers are  Messrs.  George  Baker,  of  Boston;  A.  B. 
Leach,  of  New  York;  W.  S.  Hayden,  of  Cleve- 
land; W.  M.  L.  Fiske  and  J.  J.  O'Brien,  of  Chi- 
cago; and  JohnNickerson,  Jr.,  of  St.  Louis.  Since 
such  a  report,  in  any  event,  involved  writing 
practically  a  little  treatise  on  the  general  subject 


IV 


PREFACE 


of  taxation,  I  decided  to  make  it  as  nearly  such 
as  its  primary  purpose  permitted,  and  Messrs. 
Houghton  Mifflin  Company  undertook  its  pub- 
lication. The  reader  should  remember  that  the 
report  does  not  appear  as  expressing  the  opinion 
of  the  Association,  but  simply  as  my  personal 
opinion. 

I  have  tried  to  be  as  simple  as  possible  in  stat- 
ing the  principles.  I  should  like  to  make  a  state- 
ment so  plain  that  every  voter  could  understand 
the  meaning  of  every  word,  phrase,  sentence,  and 
paragraph.  Taxation  is  not,  however,  an  easy 
matter.  As  a  pamphlet  on  the  subject  said,  in 
referring  to  a  dinner  of  mayors  who  passed  a 
resolution  on  some  phase  of  it,  "Taxation  is  not 
to  be  mastered  between  the  caviare  and  the 
coffee."  Besides,  an  extremely  simple  statement 
is  not  always  consistent  with  brevity,  and  I  was 
writing  primarily  for  men  of  affairs  familiar  with 
economic  concepts  and  capable  of  grasping  their 
import.  Time  is  of  the  essence  with  them,  and  it 
was  necessary  to  be  brief.  I  have  been  as  simple 
as  I  could  be  under  the  circumstances,  and  I  be- 
lieve the  constant  use  of  concrete  illustrations  will 
make  the  matter  understandable  to  those  who 
are  not  especially  trained  in  economic  thinking. 

Some  people,  I  am  aware,  will  charge  the  work 
with  prejudice  on  account  of  its  origin.  I  am 
content  to  have  them  look  on  it  as  being  as  parti- 


PREFACE  V 

san  as  possible  if  they  will  really  consider  the 
argument.  So  far  as  the  discussion  reaches  results 
in  ideas  on  the  taxation  of  intangibles,  I  believe 
it  is  in  substantial  accord  with  all  the  recognized 
authorities.  They  cannot  be  accused  of  ex-parte 
argument.  I  would  relieve  them,  however,  from 
all  responsibility  for  the  course  of  reasoning  by 
which  I  have  reached  my  opinions.  The  work  is 
put  out  with  full  notice  of  the  influence,  if  any,  of 
the  "special  interest"  involved.  As  a  matter  of 
fact,  I  painstakingly  sought  reasons  for  imposing 
some  taxation  on  intangibles. 

I  wish  to  express  my  appreciation  of  the  kind- 
ness of  Mr.  John  Tatlock,  president  of  the  West- 
chester Avenue  Bank,  New  York  City,  and  of 
Professor  Chester  A.  Phillips,  of  Dartmouth  Col- 
lege, for  reading  the  manuscript  and  making 
helpful  suggestions. 

Hastings  Lyon. 

New  York,  July  15,  1914. 


CONTENTS 

I.  What  Is  Taxation?       i 

II.  What  Shall  Be  Taxed? 12 

III.  Should  all  Property  Be  Taxed  Alike?  .  31 

IV.  Where  Should  Taxes  Be  Paid?    ...  59 
V.  How  Should  Taxes  Be  Assessed?     .    .  90 

VI.  Should  State  and  Local  Taxation  Be 

Kept  Apart? 96 

VII.  Are  Corporations  Taxed  too  Little?    .  113 
VIII.  Single  Tax,  the  Increment  Tax,  and 

Local  Option  in  Taxation     .    .    .    .120 


PRINCIPLES  OF 
TAXATION 

CHAPTER   I 

WHAT  IS  TAXATION? 

In  answering  our  question  we  will  consider  why 
we  have  taxes  and  what  a  tax  is. 

Elasticity  of  the  public  income 

John  Smith  must  adjust  his  expenditures  to  his 
income  or  else  come  to  grief.  He  must  in  the  long 
run  live  within  his  means.  He  can  lower  his  scale 
of  living  to  meet  the  income  he  is  receiving  much 
more  readily  than  he  can  increase  his  income  to 
meet  a  desired  scale  of  living.  Economic  and 
social  conditions  and  his  own  abilities  hedge  him 
in. 

Acting  in  an  organized  political  capacity  as  the 
nation,  the  state,  the  county,  city,  town,  village, 
school,  or  other  taxing  district,  the  community 
reverses  the  process  which  its  individual  member, 
John  Smith,  must  go  through,  and  first  considers 
expenditure,  then  income.  Though  in  practice 
the  community  often  does  take  into  account  its 


2  PRINCIPLES   OF  TAXATION 

past  income  when  deciding  on  future  expenditure, 
if  it  wanted  anything  strongly  enough  it  would 
disregard  its  ordinary  income  and  determine  to 
provide  more. 

The  total  production  of  wealth 

Each  year  the  community  produces  an  aggre- 
gate of  new  wealth  which  is  its  annual  income.  It 
may  choose  to  use  this  income,  or  any  part  of  it, 
through  private  or  through  public  channels. 
There  is  no  distinction,  in  the  nature  of  the  activi- 
ties themselves,  between  a  private  activity  — 
that  is,  one  carried  on  by  people  acting  in  their 
individual  capacities  —  and  a  public  activity 
carried  on  by  the  community  acting  as  a  political 
group.  Whether  a  particular  activity  shall  be 
public  or  private  depends  simply  on  which  the 
community  considers  the  more  advantageous  for 
it.  It  can  decide  whether  much  or  little  of  its 
activities  shall  be  public,  whether  much  or  little 
of  its  total  income  shall  be  expended  through 
public  channels. 

Public  income  cannot  be  indefinitely  extended 

It  is  because  public  activities  are  only  part  of 
the  total  activity  of  the  community  that  it  is  pos- 
sible in  making  estimates  to  plan  the  expendi- 
tures first  and  provide  afterwards  an  income  to 
match.    If  public  activities  should  approach  the 


WHAT    IS  TAXATION?  3 

total  of  all  activities  of  the  community,  we  should 
find  the  total  community  income  even  more 
rigidly  limited  than  John  Smith's  private  in- 
come. The  public  organization,  the  State  or  city, 
would  then,  when  estimating,  have  to  set  down 
the  amount  of  income  first  and  make  expendi- 
tures match,  just  as  John  Smith  must  now  do. 

Present  public  activities 

Communities  at  present  generally  regard  it 
expedient  that  the  public  organization,  the  com- 
munity acting  as  a  whole,  should  have  charge  of 
certain  matters.  To  protect  life  and  limb  and  to 
preserve  the  individual  in  the  enjoyment  of  his 
private  property  and  rights,  the  community  has 
given  the  police  power  to  its  public  organization, 
the  State,  and  relieved  the  individual  from  fight- 
ing single-handed  for  his  own  against  those  who 
may  be  disposed  to  molest  him.  It  has  extended 
this  power  in  many  directions  to  guard  against 
other  than  direct  attacks,  and  offers  protection 
to  health,  safety,  and  against  fraud. 

The  army  and  the  navy  represent  simply  a 
special  form  of  police  power.  They  are  maintained 
to  protect  the  particular  communal  group  from 
molestation  by  another  group.  Fire  departments 
afford  another  special  form  of  what  is  essentially 
a  police  protection.  Judicial  systems  are  organized 
for  the  protection  of  legally  recognized  rights. 


4  PRINCIPLES  OF  TAXATION 

The  community  must  appropriate  some  of  its 
wealth  for  the  pubHc  use  to  maintain  this  police 
and  judicial  organization.  Our  familiarity  with 
this  practice,  and  the  fact  that,  outside  of  the 
small  group  of  anarchists,  opinion  in  favor  of  it  is 
unanimous,  makes  us  likely  to  consider  it  in  the 
nature  of  things  rather  than  as  the  matter  of 
social  expediency  that  it  is.  We  are  familiar,  too, 
with  parks,  sewers,  streets,  and  sidewalks  as 
forms  of  public  activity. 

Opinion  of  social  expediency  shifts 

Social  activity  also  expresses  itself  in  a  pub- 
licly organized  form  in  the  building  and  main- 
tenance of  highways  and  bridges.  In  this  familiar 
public  undertaking  we  more  readily  recognize  the 
idea  of  expediency.'  Some  bridges  used  by  the 
community  at  large  are  still  privately  owned  toll- 
bridges.  Our  grandfathers  knew  privately  owned 
toll-roads.  Perhaps  a  few,  indeed,  still  exist. 
Sometimes  now  the  water-supply  is  a  private, 
sometimes  a  public,  undertaking.  A  newly  de- 
vised form  of  highway,  the  railroad,  developed  as 
private  property.  It  universally  remains  private 
property  in  the  United  States.  In  some  communi- 
ties it  is  wholly  or  partly  public  property.  So  it  is 
possible  for  a  private  activity  to  exist  contempo- 
raneously with  a  public  activity  in  the  same  field. 
The  State  may  carry  on  a  public  activity  partly 


WHAT    IS  TAXATION?  5 

by  private  agencies.  Privately  owned  and  oper- 
ated railroads  carry  the  mail  for  the  public  post- 
office.  Community  opinion  may  be  that  a  given 
activity  need  not  necessarily  be  either  exclusively 
public  or  exclusively  private.  Our  schools  are 
partly  private,  partly  public.  We  recognize  that 
it  is  expedient  that  the  State  conduct  some 
schools,  but  do  not  consider  it  necessary  that  the 
State  should  conduct  all  schools. 

It  is  no  part  of  our  purpose  here  to  go  Into  the 
question  of  what  activities  should  be  public  and 
what  private.  The  answer  comes,  in  the  end, 
simply  to  a  matter  of  enforcible  opinion.  At 
present  unenforcible  opinions  range  all  the  way 
from  those  of  anarchists,  who  would  have  no 
public  undertaking  whatever,  to  those  of  social- 
ists, who  would  have  all  undertakings  public.  We 
are,  in  this  discussion,  interested  only  in  the  fact 
that  certain  activities  are  private  and  other  activ- 
ities are  public. 

Public  organization  may  charge  a  price  for 
services 

We  are  concerning  ourselves  now  only  with  the 
question  that  arises  after  it  has  been  determined 
that  certain  activities  shall  be  public.  How  shall 
the  public  organization  meet  the  cost  of  carrying 
them  on? 

The  public  may  conduct  its  undertakings  on 


6  PRINCIPLES   OF  TAXATION 

the  same  basis  as  a  private  enterprise.  It  may 
charge  a  price  for  whatever  it  furnishes.  When  a 
community  undertakes  to  supply  electric  light  to 
householders,  it  regularly  meets  the  cost  by 
making  a  charge  to  each  householder  in  propor- 
tion to  his  use.  When  it  supplies  transportation 
by  street  or  steam  railway,  it  likewise  charges  a 
price  based  on  the  cost  of  furnishing  the  service. 
For  one  reason,  the  force  of  example  is  strong. 
These  were  recently  private  enterprises.  When 
the  public  takes  them  over,  it  naturally  follows 
the  private  practice.  It  is  fairly  easy  to  allocate 
the  cost  to  the  user.  It  may  be  remarked  that  the 
public  organization  has  an  unfortunate  tendency, 
when  determining  costs  and  charges,  to  overlook 
the  capital  investment.  The  community  fur- 
nishes the  capital  and  should  make  the  charge 
cover  interest. 

Special  assessments  may  reimburse  the  public 
organization 

The  community  might  follow  the  same  course 
of  charging  a  price  with  such  public  undertakings 
as  the  highways,  streets,  and  sewers.  Though 
much  more  difficult,  and  therefore  less  desirable, 
it  would  not  be  impossible.  To  a  very  consider- 
able extent  it  does  allocate  the  cost  of  streets, 
sewers,  and  sidewalks  by  special  assessment  to 
the    abutting    property-owner.     It    should    be 


WHAT    IS  TAXATION?  7 

noticed  that  this  is  an  original  allocation  of  the 
capital  cost  instead  of  an  advancing  of  the  capital 
and  a  subsequent  collection  of  the  capital  charge. 
This  is  equally  true,  whether  the  charge  be  met 
by  an  immediate  cash  payment  or  by  borrowing 
through  the  issuance  of  special  assessment  bonds. 
In  this  form  of  public  undertaking,  streets, 
sidewalks,  and  sewers,  it  should  be  noted  that  the 
initial  capital  cost  is  large,  in  proportion  to  the 
cost  of  maintenance  and  operation,  compared  with 
such  undertakings  as  lighting  and  transportation. 
The  special  assessment  involves,  too,  less  exact 
justice  in  allocation  of  expense  than  charging  a 
price  based  on  cost.  In  undertakings  in  which 
the  capital  cost  is  met  by  special  assessment 
against  the  abutters,  they,  who  are  the  principal 
users,  may  not,  and  usually  do  not,  defray  the 
cost  of  maintenance  and  operation,  such  as  clean- 
ing sewers  and  streets.  Though  the  abutting 
property-owners  may  be  the  principal  benefici- 
aries, they  are  not  the  only  ones  in  the  case  of 
streets  and  sidewalks.  Thoroughfares  are  used 
by  people  who  have  no  concern  with  the  abutting 
Ijroperty.  So  we  may  consider  that  in  a  rough 
way  the  public  use  of  the  thoroughfare  offsets  the 
public  cost  of  "operation."  We  will  find  a  great 
deal  (A  this  ready  approximation  of  justice  as  we 
go  on  with  the  consideration  of  meeting  the  cost 
of  public  undertakings. 


8  PRINCIPLES  OF  TAXATION 

Fees  meet  the  cost  of  some  public  services 

The  community  meets  the  cost  of  a  consider- 
able variety  of  pubHc  service  by  charges  called 
"fees.'^  These  are  distinguishable  from  the  price 
charged,  say,  for  electric  lighting,  chiefly  by  the 
nature  of  the  service  performed.  Prices  are 
charged  for  what  may  be  called  economic  services 
wanted  by  the  individual  for  his  private  benefit, 
and  fees  for  what  may  be  called  primarily  social 
services,  or  those  performed  for  the  benefit  of  the 
community.  The  public  organization  charges  a 
fee  for  acting  in  its  regulative  capacity,  charges 
for  marriage  licenses,  and  for  recording  docu- 
ments. That  is,  a  fee  is  not  charged  because  the 
service  benefits  the  individual  against  whom  it  is 
charged.  The  service  is  for  the  benefit  of  the  com- 
munity as  a  whole.  Fees  and  prices  have  been 
distinguished  on  the  ground  that  fees  are  com- 
pulsory and  prices  contractual.  But  if  the  public 
organization  is  the  sole  source  of  electric-light 
supply,  the  price  for  electric  light  is  just  as  com- 
pulsory for  one  who  wants  it  as  the  fee  for  a 
license  to  a  man  who  wants  to  get  married.  A 
special  assessment,  however,  is  compulsory.  One 
may  question  the  strict  justice  of  charging  to  a 
particular  individual  the  expense  of  a  service  for 
the  general  benefit.  Why,  for  example,  should 
the  cost  of  administering  inspection  laws  for  the 


WHAT    IS  TAXATION?  9 

benefit  of  the  community  be  charged,  as  it  some- 
times is,  to  men  engaged  in  the  business  subject 
to  inspection? 

It  may  be  objected  that  a  court  fee  is  charged 
for  a  service  performed  for  the  benefit  of  an  indi- 
vidual in  pursuing  his  private  litigation  to  enforce 
his  personal  right.  One  reply  might  be  given  that 
it  is  paid  really  to  maintain  the  social  instrument 
of  justice  provided  in  the  courts  in  order  to  secure 
peace  to  the  community  and  that  a  proportional 
part  of  the  judge's  salary  is  not  paid  by  the  liti- 
gant. Another  reply  might  be  that  if  the  service 
is  looked  on  as  an  individual  rather  than  as  a 
social  benefit,  the  so-called  fee  is  really  a  price. 
In  the  actual  administration  of  court  fees, 
whereby  costs  are  charged  to  the  unsuccessful 
litigant,  the  fee  is  rather  in  the  nature  of  a  pen- 
alty, either  for  having  brought  an  unfounded 
action  or  for  not  having  met  an  obligation  with- 
out the  compulsion  of  the  courts. 

Whenever  the  charge  exceeds  the  cost  of  the  ser- 
vice, whether  the  ser\ace  be  individual  or  social  in 
its  nature,  the  excess  over  cost  becomes  a  tax.  If  the 
service  were  performed  by  private  instead  of  pub- 
lic enterprise  such  a  surcharge  would  be  a  profit. 

What  a  tax  is 

Disregarding  fines  and  penalties,  as  not  being 
imposed  primarily  for  the  sake  of  the  public  rev- 


lO         PRINCIPLES  OF  TAXATION 

enue,  we  come  to  that  large  part  of  the  public 
service  in  which  it  seems  inexpedient  for  one 
reason  or  another  to  attempt  to  allocate  to  indi- 
viduals the  cost  of  doing  the  service  in  strict  pro- 
portion to  the  amount  of  service  performed  for 
the  individual. 

It  may  seem  inexpedient  for  several  reasons, 
all  of  which  may  coexist  in  a  given  case. 

(i)  One  reason  may  be  the  difficulty  of  making 
the  allocation.  The  salary  of  a  legislator  or  a 
governor  or  a  mayor  would  illustrate  this  as  well 
as  other  difficulties. 

(2)  Another  reason  may  be  the  difficulty  of 
collecting  the  charge.  To  endeavor  to  defray  the 
cost  of  maintaining  and  operating  a  busy  thor- 
oughfare by  collecting  a  carefully  allocated 
charge  would  involve  a  heavy  cost  of  collection 
and  such  a  hampering  of  traffic  as  to  be  very 
burdensome,  in  addition  to  the  great  difficulty  in 
making  the  allocation. 

(3)  A  third  and  very  important  reason  lies  in 
the  value  to  the  community  in  having  all  its 
members  enjoy  the  benefit  of  a  particular  service. 
In  such  cases  the  expense  is  defrayed  in  some  way 
so  that  no  one  may  be  deprived  of  the  service 
because  of  inability  to  pay  the  cost.  It  is  impor- 
tant that  the  public  peace  be  maintained  and  that 
the  life,  limb,  and  liberty  of  every  member  of  the 
community  be  protected.    Besides  the  difficulty 


WHAT   IS  TAXATION?  ii 

of  allocating  the  cost,  this  protection,  in  the 
opinion  of  all  people  but  anarchists,  must  be 
given  every  one,  and  must  be  irrespective  of 
ability  to  pay. 

Public  schools  afford  the  best  example  of  this 
third  reason.  It  would  not  be  especially  difficult 
either  to  allocate  the  cost  or  to  collect  it,  yet  the 
community  considers  it  so  important  that  every 
one  have  the  advantage  of  a  certain  amount  of 
school  training  that  it  provides  this  training 
through  its  public  organization  without  paying 
any  attention  to  the  matter  of  directly  appor- 
tioning the  cost. 

We  shall  consider  this  last  part  of  the  public 
expenditure  —  that  in  which  the  community 
makes  no  attempt  at  any  precise  allocation  of  the 
cost,  but  appropriates  part  of  the  general  priv- 
ately owned  wealth  to  meet  the  special  public 
expense.  The  proceeds  of  such  an  appropriation 
constitute  what  is  properly  a  tax.  Our  purpose  is 
to  show  in  what  way  such  an  appropriation  actu- 
ally is  made,  the  principles  on  which  it  should  be 
made,  and  to  see  if  our  present  methods  of  appro- 
priation accord  with  those  principles. 


CHAPTER   II 

WHAT   SHALL    BE   TAXED? 

Since  we  have  considered  why  taxes  are,  and 
what  they  are,  we  can  now  go  on  to  discuss  at 
what  points  that  wealth  which  is  acquired  by 
private  undertakings  shall  be  detached  from  its 
private  ownership  for  application  to  the  general 
public  expenditure.  Of  course  some  person 
always  makes  the  actual  payment  of  a  tax. 
Either  the  individuals  making  up  a  community 
or  the  community  acting  in  its  organized  public 
capacity  have  the  entire  ownership  of  the  wealth 
of  the  community.  Though  the  individuals  may 
organize  themselves  in  the  form  of  a  partnership, 
association,  or  corporation,  they  are  the  ulti- 
mate real  owners,  and  we  must  consider  any 
matter  of  taxation  as  affecting  them.  The  com- 
munity may,  however,  take  the  individual's  pri- 
vately owned  wealth  and  transfer  it  to  the  public 
ownership  according  to  some  aspect  or  relation- 
ship of  the  individual. 

It  may  tax  the  individual  according  to  his  in- 
come, or  according  to  the  value  of  the  property 
he  owns,  or.  according  to  the  nature  or  volume  of 
the  business  he  does,  or  according  to  whatever 
else  it  might  choose.   In  order  to  save  time,  and 


WHAT   SHALL   BE  TAXED?         13 

to  speak  in  the  common  language,  instead  of  us- 
ing such  an  extended  phrase  as  "taxing  an  indi- 
vidual according  to  his  property  or  according  to 
his  income,"  we  will  ordinarily  hereafter  speak  of 
taxing  income,  or  of  taxing  property,  or  of  taxing 
occupation,  or  whatever  may  be  taken  as  the 
measure  of  the  tax.  We  have  always  to  consider, 
however,  the  effect  of  the  tax  on  the  individual 
who  pays  it  and  on  the  public  revenue.  As  a 
matter  of  fact  taxes  are  generally  and  largely 
levied  according  to  property.  Let  us  consider 
whether  this  is  desirable. 

Theories  of  taxation 

There  are  two  general  theories  by  which  the 
community  may  impose  taxes.  It  may  tax 
according  to  j,, general  consideration  of  the  ex- 
pense which  the  individual  imposes  on  the 
Government,  or  it  may  tax  according  to  a  general 
consideration  of  the  individual's  ability  to  pay. 
In  each  case  the  theory  must  be  stated  as  a  gen- 
eral consideration  of  cost  or  ability^  because,  as 
we  shall  see,  it  is  impossible  or  impracticable  to 
apportion  the  tax  with  any  degree  of  exactness 
to  cost  or  ability. 

Cost  to  government  theory 

It  seems  preferable  to  state  the  theory  first 
mentioned  as  one  of  apportioning  the  tax  accord- 


14        PRINCIPLES  OF  TAXATION 

ing  to  the  cost  to  the  Government  rather  than  to 
state  it  as  apportioning  the  tax  according  to  the 
benefit  to  the  individuals.  Cost  and  benefit  do 
not,  to  be  sure,  amount  to  the  same  thing. 
The  people  who  speak  of  benefit  really  are  think- 
ing most  of  cost.  To  consider  benefit  leads  into 
the  amazingly  difficult  philosophical  problem  of 
value.  Cost  involves  a  problem  of  accounting 
easier  to  solve  in  the  fiscal  matter  of  taxation.  ^ 

Theory  of  ability  to  pay 

People  who  write  on  the  theory  of  taxation 
to-day  are  likely  to  discard,  or  largely  to  disre- 
gard, the  principle  of  cost  or  benefit  as  unsat- 
isfactory, and  to  place  the  entire  emphasis  on 
ability  to  pay.  I  am  unable  to  agree  that  the 
theory  of  cost  or  benefit  is  either  untenable  as 

1  Since  economists  will  consider  this  statement  of  taxa- 
tion theory  rather  casual,  to  say  the  least,  and  will  attribute 
it  to  ignorance,  I  will  explain  that  I  am  aware  of  and  have 
considered  the  wide  variety  of  theory  discussed  by  such 
American  writers  as  Henry  Carter  Adams,  The  Science  of 
Finance;  Edwin  R.  A.  Seligman,  Essays  in  Taxation; 
David  Ames  Wells,  The  Theory  and  Practice  of  Taxation; 
Carl  C.  Plehn,  Introduction  to  Public  Finance;  Francis 
Walker,  Double  Taxation  in  the  United  States;  Stephen  F. 
Weston,  Principles  of  Justice  in  Taxation;  to  say  nothing 
of  the  foreign  writers  on  taxation.  I  have  chosen  to  limit 
the  discussion  to  the  two  theories  stated  in  the  text  as 
those  really  significant  and  to  avoid  obscuring  the  argument 
by  a  fuller  discussion  of  the  theory.  I  want  to  make  my 
argument  as  direct  as  I  can. 


WHAT   SHALL   BE  TAXED?         15 

explaining  present  tax  phenomena,  or  undesir- 
able as  a  principle  on  which  to  base  taxation 
measures.  It  seems  to  me  that  neither  the  cost  or 
benefit  theory,  nor  the  theory  of  ability  to  pay, 
alone  adequately  explains  our  present  taxes  or 
alone  makes  a  sufficient  foundation  for  construc- 
tive work. 

Tax  practice  does  not  square  with  exclusive 
theory  of  ability  to  pay 

Though  what  constitutes  ability  to  pay  pre- 
sents almost  as  difficult  a  problem  as  what 
measures  benefit,  still  it  is  fairly  obvious  that  a 
man  earning  $10,000  a  year  from  the  practice  of  a 
profession  is  probably  better  able  to  pay  a  tax 
than  an  invalid  who  receives  a  gross  income  of 
$1000  a  year  from  the  ownership  of  real  estate, 
worth,  let  us  say,  $10,000,  and  has  no  other  in- 
come whatever.  Yet  the  real  estate  owner,  pay- 
ing taxes  at  the  rate  of  $1.50  per  $100,  would 
have  to  pay  $150  in  taxes  besides  providing  for 
repairs  and  depreciation,  atll  of  which  would  prob- 
ably reduce  the  $1000  of  gross,  to  $500  of  net, 
income.  Here,  then,  is  a  situation  existing  in 
most  of  the  States,-  a  real  estate  owner  paying 
state  and  local  taxes  of  $150  against  a  net  income 
of  $500,  and  a  professional  man  with  a  net  income 
of  $10,000  who  pays  no  state  and  local  taxes  and 
no  direct  taxes  at  all,  except  the  slight  federal 


I6         PRINCIPLES  OF  TAXATION 

income  tax  which  is  equally  levied  on  income 
from  real  estate. ^ 

An  income  from  labor  does  not  indicate  the  same 
ability  as  an  equivalent    income   from    property 

On  the  other  hand,  compare  the  man  who 
receives  a  net  income  of  $5000  because  of  his 
ownership  of  property  —  or  let  us  say  capital,  to 
use  the  economic  term  —  with  the  man  who 
receives  a  net  income  of  $5000  for  services,  —  or, 
again  to  preserve  the  economic  term,  let  us  say 
labor.  Is  the  man  who  receives  an  income  of 
$5000  for  labor  able  to  pay  as  much  into  the  pub- 
lic revenue  as  the  man  who  receives  an  income 
of  $5CXX)  from  capital?  The  $5000  income  from 
capital  is  presumably  continuing.  It  will  go  on 
irrespective  of  the  health  or  age  of  the  capitalist. 
It  may  extend  after  his  death  for  those  whom  he 
may  wish  to  benefit.  Out  of  the  $5000  income 
from  labor  the  man  who  receives  it  must  provide 
against  sickness  disqualifying  for  work.  To  put 
him  on  an  equal  basis  with  the  capitalist  as  to 

*  Wisconsin  has  an  income  tax  which  ranges  from  one 
per  cent  to  approaching  six  per  cent.  It  should  be  pointed 
out  that  even  six  per  cent  on  income  amounts  to  a  tax  of 
only  thirty  cents  on  one  hundred  dollars  of  capital.  This 
statement,  of  course,  assumes  capitalizing  the  income  on  a 
basis  of  five  per  cent.  Some  other  States  have  income  tax 
laws.  It  is  generally  stated,  however,  that  these  are  not 
enforced.  Southern  States  have  occupation  taxes. 


WHAT   SHALL   BE  TAXED?         17 

ability  to  pay,  he  must  further  set  aside  enough 
of  his  income  to  amount  to  $100,000  by  the  time 
he  is  no  longer  able  to  earn  the  income.  At  five 
per  cent  this  would  continue  the  income  of  $5000 
to  death  and  to  his  heirs  or  next  of  kin  or  legatees. 
Picturing  the  situation  a  little  more  clearly, 
imagine  our  earner  going  to  an  insurance  com- 
pany and  asking  what  premium  it  would  charge 
him  for  policies  that  would  pay  him  at  the  rate  of 
$5000  during  disability,  no  matter  how  long,  from 
sickness  or  accident  or  old  age,  and  would  pro- 
vide $100,000  at  death.  This  indicates  only  a  few 
of  the  differences  between  income  from  labor  and 
income  from  capital,  but  enough,  I  think,  to  show 
that  they  are  not  at  all  the  same  thing.  This  is  not, 
of  course,  to  say  that  income  from  labor  does  not 
give  ability  to  pay  and  ought  not  to  be  taxed  at  all. 

Even  net  income  from  property  does  not  afford  a 
true  measure  of  ability 

People  often  assume  that  the  taxation  of  net 
income  would  approximate  a  tax  according  to 
ability  more  nearly  than  any  other  form  of  taxa- 
ation.  Let  us  inquire  if  this  is  true  even  of  income 
from  capital.  We  are  using  the  word  "capital"  as 
if  it  were  synonymous  with  "property."  As  we 
shall  see,  this  assumption  is  one  of  the  ingrained 
fallacies  of  taxation  practice ;  but  the  distinction 
is  not  immediately  material. 


i8         PRINCIPLES  OF  TAXATION 

Assume  that  one  man  has  $100,000  invested  in 
a  manufacturing  estabHshment  in  which  he  owns 
a  quarter  interest  and  that  he  could  sell  his  inter- 
est for  $100,000.  From  this  ownership  he  derives 
an  income  of  $10,000  or  ten  per  cent.  Another 
man  has  invested  $100,000  in  a  street  railway  in 
such  a  way  that  he  derives  an  income  of  $5000 
from  his  ownership,  or  five  per  cent.  The  fact 
that  the  man  having  capital  in  the  form  of  fac- 
tory property  derives  an  income  of  ten  per  cent, 
while  at  the  same  time  the  man  having  capital 
invested  in  street  railway  property  derives  an  in- 
come of  only  five  per  cent,  indicates  to  any  stu- 
dent of  economics  that,  in  the  opinion  of  the 
community  at  least,  the  man  who  is  getting  ten 
per  cent  is  taking  more  risk  than  the  man  who  is 
getting  only  five  per  cent.  Considering  the  ten 
per  cent  man's  liability  to  loss,  he  must  set  aside 
five  per  cent  as  an  insurance  fund  to  place  himself 
on  the  same  basis  as  to  the  probability  of  con- 
tinued income  as  the  five  per  cent  man.  As 
pointed  out  in  the  discussion  of  the  difference 
between  income  derived  from  capital  and  income 
derived  from  labor,  the  probable  continuity  of 
income  makes  a  great  deal  of  difference  in  esti- 
mating ability  to  pay.^ 

^  A  provision  in  an  income  tax,  such  as  appears  in  the 
federal  law,  permitting  the  deduction  of  losses  in  a  given 
year  from  the  income  of  that  year  for  taxation,  does  a 
little  toward  offsetting  the  taxation  of  risk.    Since  the  tax 


WHAT   SHALL   BE  TAXED?  19 

Market  price  of  property  a  fairer  index  than  income 
from  it  of  ability  to  pay  taxes  on  account  of  it 

If  income  is  not  altogether  a  satisfactory  means 
for  measuring  ability  to  pay,  what  shall  the  meas- 

may  be  paid  on  the  risk  for  many  years  and  the  oflFset  is  only 
for  one  year,  it  is  entirely  inadequate  to  meet  the  situation. 
As  the  Federal  Income  Tax  reads,  there  may  be  deducted 
from  gross  income  in  computing  net  income,"  Fourth,  losses 
actually  sustained  during  the  year,  incurred  in  trade  or 
arising  from  fires,  storms,  or  shipwreck,  and  not  compen- 
sated for  by  insurance  or  otherwise;  fifth,  debts  due  to  the 
taxpayer  actually  ascertained  to  be  worthless  and  charged 
oS  within  the  year." 

Assume  the  case  of  a  man  who  believes  in  investing  in 
seven  per  cent  preferred  stocks  and  purchasing  those  of  a 
number  of  corporations  in  order  to  distribute  the  risk. 
Suppose  he  buys  $140,000  of  such  stocks  in  ten  companies. 
His  annual  income  amounts  to  $9800.  Allowing  him  a  de- 
duction of  $4000,  he  will  have  to  pay  an  income  tax  on 
$5800.  On  the  assumption  that  a  capital  commitment 
practically  without  risk,  as  in  some  high-grade,  underlying 
railroad  bond,  yields  four  per  cent,  then  three  per  cent  of 
this  man's  seven  per  cent  dividends  represent  risk.  Of  the 
$9800  of  his  total  income,  $4200  represents  risk.  To  be  on 
the  same  basis  with  the  man  who  has  invested  in  the  "risk- 
less"  four  per  cent  security,  he  should  pay  a  tax  on  only 
$600.  Let  us  suppose  he  continues  to  pay  a  tax  on  $5800  for 
ten  years,  when  a  corporation  in  which  he  owns  $7000  of 
stock  becomes  insolvent,  and  his  stock  worthless.  In  that 
year  he  receives  seven  per  cent  from  $133,000  of  stock,  or 
an  income  of  $9310.  If  he  were  not  allowed  to  deduct  his 
loss,  he  would  have  to  pay  taxes  on  S5310.  Since  he  may 
deduct  his  $7000  loss  in  this  year,  he  does  not  for  this  one 
year  have  to  pay  a  tax  at  all.  That  is,  he  has  paid  a  tax  on 
$4200  of  income  representing  risk  for  ten  years,  and  has  re- 
mitted to  him  the  tax  on  $5310  for  one  year. 


20         PRINCIPLES  OF  TAXATION 

ure  be?  So  far  as  the  ability  depends  on  income 
derived  from  the  ownership  of  land  or  capital,  our 
practice  may  be  more  nearly  just  than  we  some- 
times suppose.  The  greater  part  of  our  taxes  are 
derived  by  lewing  them  on  property  according 
to  its  value  as  measured  by  its  market  price.  It  is 
true  that  the  market  price  for  the  great  mass  of 
property  —  at  any  rate  of  land  and  of  capital 
used  in  production  —  depends  on  the  income 
derivable  from  its  use.  That  is  quite  as  we  would 
have  it.  Market  price,  however,  which  is  the 
community  appraisal  of  value,  takes  into  consid- 
eration such  elements  as  risk  and  makes  the 
proper  allowance  for  the  probable  continuance  of 
the  income.  So  does  the  income  itself,  to  be  sure, 
but  does  it  by  including  the  return  for  the  risk. 
Take  a  form  of  property  in  which  the  situation  is 
most  readily  apparent.  Compare  a  corporation 
bond  selling  to  yield  4.5  per  cent  with  a  corpora- 
tion bond  selling  to  yield  7  per  cent.  The  addi- 
tional 2.5  per  cent  indicates  risk.  Market  price 
takes  risk  into  consideration  by  discounting  it. 
Suppose  two  corporation  bonds  each  state  that 
they  pay  interest  at  the  rate  of  5  per  cent.  One 
sells  for  100,  the  other  at  95.  The  lower  price  has 
discounted  risk.  This  is  just  what  we  want  to 
arrive  at  for  the  purpose  of  taxation. 


WHAT   SHALL   BE  TAXED?         21 

Prices,  fees,  and  special  assessments  are 
applications  of  the  principle  of  cost 

Let  us  apply  as  a  test  of  taxation  a  consider- 
ation of  the  expense  an  individual  imposes  on  the 
Government.  We  have  already  considered  cer- 
tain public  activities  in  which  the  entire  cost  can 
be  allocated  to  all  the  beneficiaries.  This  would 
be  the  case  of  the  public  organization  undertak- 
ing private  electric  lighting.  We  have  remarked 
that  the  expense  is  not  allocated  in  proportion  to 
the  benefit  received,  but  in  proportion  to  the  cost 
of  rendering  the  service. 

The  community  also  levies  according  to  cost  in 
the  case  of  special  assessments  for  streets  and 
sidewalks  in  which  the  cost  cannot  be  allocated 
to  all  the  beneficiaries;  for  those  people  who  use 
the  street  or  sidewalk  as  a  thoroughfare,  and  not 
at  all  for  access  to  any  premises  on  the  street,  are 
beneficiaries  as  well  as  the  abutting  owners  them- 
selves. In  the  case  of  fees  for  such  things  as 
licenses,  which  the  community  requires  for  regu- 
lation, it  goes  even  so  far  as  to  charge  the  cost  of 
the  service  to  the  applicant,  though  not  he  but 
the  community  gets  the  benefit.  In  the  case  of 
prices  and  special  assessments,  and  even  of  fees, 
people  do  not  generally  object  to,  in  fact  they 
generally  approve  of  as  fair,  this  method  of  ex- 
acting payment  according  to  cost.    May  not  the 


22         PRINCIPLES   OF  TAXATION- 

application  of  the  principle  be  extended  to  taxa- 
ation  proper? 

Extending  to  taxation  the  principle  of  payment 

for  cost 

That  one  should  in  general  pay  for  benefits 
received  seems  a  sound  proposition.  Individuals 
conduct  their  business  relations  with  each  other 
on  that  basis.  Requiring  payment  has  the  social 
advantage  of  helping  to  prevent  waste.  It  leads 
to  a  realization  that  the  service  or  other  bene- 
fit has  cost  something,  has  required  sacrifice. 
Nothing  else  quite  so  effectively  brings  this  home 
to  the  individual  receiving  the  result  of  the  sacri- 
fice as  requiring  him  to  pay,  to  make  some  sac- 
rifice in  return.  Certainly  it  is  not  fair  to  impose 
a  sacrifice  on  those  who  receive  none  of  the  bene- 
fits for  the  purpose  primarily  of  freeing  those 
who  do  receive  the  benefits  from  giving  a  quid 
pro  quo.  So  it  would  seem  fair  to  extend  so  far  as 
possible  the  principle  of  payment  for  the  public 
service  in  those  cases  in  which  that  principle  is 
not  overridden  by  considerations  which  the  com- 
munity counts  more  important. 

If  the  community  had  not  based  its  taxation  on 
this  principle  as  well  as  on  the  principle  of  ability 
to  pay,  it  would  have  been  obliged  to  adopt  the 
principle  of  progression  in  taxation  to  an  extent 
no  one  has  dreamed  of  applying  in  practice.  To 


WHAT   SHALL   BE  TAXED?  23 

hold  that  this  is  not  so,  it  seems  to  me  that  the 
term  "ability"  as  applied  to  taxation  must  be 
interpreted  to  mean  something  different  from  the 
connotation  generally  understood.  The  force  of 
this  principle  of  taxation  according  to  cost  of 
service  has,  indeed,  weighed  much  heavier,  I 
believe,  than  the  force  of  the  principle  of  taxa- 
tion according  to  ability  to  pay. 

What  is  ability  to  pay? 

The  question  of  what  constitutes  ability  to  pay 
presents  an  ever-recurring  difficulty  of  definition. 
The  phrase  has  elements  almost  as  hard  to  sepa- 
rate and  define  as  the  elements  of  "value,"  or  of 
"benefit."  So  such  words  as  "value"  and  "bene- 
fit," and  phrases  like  "ability  to  pay,"  have  a 
vagueness  which  makes  them  puzzling  in  use. 
Still,  it  is  possible  to  come  to  some  conclusions 
about  them. 

Though  we  have  already  discussed  some  of  the 
difficulties  of  gauging  ability  by  net  income,  and 
the  superiority  of  property  values  in  forming  an 
estimate,  we  have  not  before  raised  the  broad 
question  of  whether  ability  to  pay  is  in  any  way 
proportionate  either  to  amount  of  income  re- 
ceived or  to  the  market  value  of  property  owned. 
If  it  is  proportional,  can  we  state  the  proportion 
in  mathematical  terms?  Does  the  ability  vary 
directly  as  the  income  or  does  it  vary,  say,  as  the 


24         PRINCIPLES   OF  TAXATION 

square  of  the  income?  On  the  test  of  a  concrete 
case  it  appears  certain  that  ability  increases 
much  more  rapidly  than  income.  Assume  that 
one  dollar  a  day  will  meet  the  absolute  require- 
ments of  an  adult  for  subsistence.  Then  the  man 
who  receives  $365  a  year  has  absolutely  no  ability 
to  pay  taxes.  If  he  should  part  with  one  per  cent, 
$3.65,  to  the  State,  on  our  assumption  he  would 
starve.  Assume  his  income  increases  one  dollar 
to  $366.  Then  he  could  part  with  that  dollar  to 
the  State  without  starving.  Compared  with  him, 
however,  a  man  receiving  an  income  of  $1365  is 
able  to  part  with  $1000  to  the  State.  It  would 
appear  from  this  that  a  complete  application  of 
the  theory  of  ability  to  pay  would  involve  estab- 
lishing a  certain  minimum  of  income  as  exempt 
from  levy  and  taking  everything  in  excess  of  that. 
Let  us  in  our  assumed  case  try  exempting  $365 
from  taxation  and  taxing  each  10  per  cent  on  his 
income  in  excess  of  that.  One  man  would  pay  10 
cents  and  have  90  cents  left ;  the  other  would  pay 
$100,  and  have  $900  left.  Each  has  paid  in  a  direct 
proportion.  Has  each  paid  according  to  his  abil- 
ity? The  principle  of  paying  according  to  ability 
is  sometimes  stated  as  one  of  equality  of  sacrifice. 
These  men  have  not  made  an  equal  sacrifice  in 
any  sense.  If  the  second  man  had  paid  only  10 
cents  into  the  public  fund  instead  of  $100,  there 
would  in  one  sense  have  been  an  equality  of  sacri- 


WHAT   SHALL   BE  TAXED?  25 

iice.  If  the  State  had  not  taken  the  10  cents,  each 
might  have  had  a  cigar  with  his  dime.  So  each 
may  be  thought  of  as  having  equally  sacrificed  a 
ten-cent  cigar.  But  I  doubt  if  this  is  what  people 
mean  when  they  say  "equality  of  sacrifice." 

Ability  to  pay  sJwuld  not  be  the  only  principle 

oj  taxation 

However  interesting  it  may  be  to  speculate 
over  what  constitutes  ability  to  pay,  as  a  matter 
of  fact  it  is  not  capable  of  such  precise  statement 
as  lends  itself  to  anything  like  exact  application. 
To  say  that  it  means  equality  of  sacrifice  simply 
substitutes  one  obscure  phrase  for  another.  Abil- 
ity to  pay  does,  as  a  term,  convey  a  substantial 
meaning  to  the  minds  of  most  people,  and  that 
meaning  involves  something  that  a  payment  in 
direct  proportion  to  income  or  property,  or  even 
any  rate  of  progression  ordinarily  thought  of, 
does  not  satisfy.  Our  present  taxation  does  not 
square  with  the  meaning  the  term  conveys  to 
people,  and  I  think  that  the  community  should 
not  now  be  guided  by  that  principle  alone  in 
levying  taxes. 

People  of  equal  ability  to  pay  taxes  may  impose 
different  costs 

Let  us  return  to  a  consideration  of  taxing  to  the 
individual  the  cost  of  the  benefit  that  the  Gov- 


26        PRINCIPLES  OF  TAXATION 

ernment  confers  on  him.  Does  one  person  nor- 
mally cost  the  Government  more  than  another? 
To  state  the  question  in  fuller  form,  does  one 
person  put  the  Government  to  greater  expense 
for  the  benefits  that  person  receives  from  the 
Government  than  another?  I  believe  the  answer 
is  "yes";  and  that  the  cost  of  certain  activities 
of  the  Government  for  each  person  may  be 
apportioned  in  a  very  rough  way  in  proportion 
to  the  value  of  the  person's  property. 

Special  costs  imposed  by  property 

There  is  the  cost  of  constructing  and  maintain- 
ing the  highways.  We  are  not  considering  now 
those  streets  which  are  built  by  special  assess- 
ment, but  such  thoroughfares  as  state,  county, 
and  town  roads,  which  the  public  organization 
pays  for  from  the  proceeds  of  taxes.  Such  roads 
are  built  as  well  as  maintained  out  of  the  general 
tax  fund  because  no  special  persons  are  so  pre- 
ponderantly the  beneficiaries  as  in  the  case  of 
streets  built  by  general  assessment.  They  do 
benefit  the  owners  of  real  and  other  tangible 
property  within  their  general  area,  however, 
more  than  they  benefit  one  who  does  not  own 
any  property  of  that  kind.  Though  the  public 
service  diffuses  itself  throughout  the  community 
in  such  a  way  that  it  is  impossible  to  follow  it 
with  a  definite   apportionment  of   the  cost  in- 


WHAT   SHALL   BE  TAXED?  27 

curred  on  account  of  each  beneficlaty,  it  is, 
nevertheless,  possible  to  select  the  general  class 
especially  benefited.  In  this  case  it  is  the  real 
and  other  tangible  property  owners.  To  appor- 
tion the  cost  among  the  members  of  this  class 
according  to  the  market  value  of  their  property 
does  not  closely  apply  alone  either  the  princi- 
ple of  apportionment  according  to  the  cost  of 
the  service  rendered  to  each  member  of  the  class 
or  the  principle  of  levying  the  tax  according  to 
ability  to  pay.  Neither  theory  alone  explains 
the  situation;  both  together  cover  it.  It  comes 
as  close  as  the  community  can  get,  under  the 
circumstances,  to  apportioning  the  cost  of  the 
service  rendered  each  beneficiary,  and  it  seems 
to  me  desirable  that  the  community  should  do 
that  with  its  public  undertakings  so  far  as  pos- 
sible. When  that  becomes  no  longer  possible, 
or  other  considerations  become  more  important, 
then  the  public  expense  not  so  apportioned  goes 
into  the  common  burden  to  be  borne  according 
to  ability. 

In  the  same  way  the  community  incurs  the 
cost  of  police  and  fire  protection  largely  on  ac- 
count of  property,  and  the  owners  of  property 
should  bear  the  burden  so  far  as  it  is  possible  to 
ascertain  what  part  of  it  is  on  their  account. 
So  far  as  the  community  furnishes  the  police  and 
fire  protection  for  the  preservation  of  life,  limb, 


28         PRINCIPLES  OF  TAXATION 

and  liberty,  the  property  owners  benefit  as  much 
as  any  other  members  of  the  community.  Since 
they  benefit  especially  as  property  owners,  it  is 
fitting  that  as  such  they  should  bear  that  part 
of  the  expense  of  which  they  are  the  beneficiaries. 
The  cost  of  this  protection  does  in  general  bear  a 
direct  proportion  to  the  market  value  of  the 
property.  This  may  be  to  an  astonishing  degree 
not  so  in  particular  instances,  especially  in  the 
matter  of  fire  protection.  Fire  protection  costs 
nothing  for  vacant  lots  or,  indeed,  for  any  land 
whatever,  whether  built  on  or  not.  It  does  not 
cost  as  much  for  an  office  building  of  fireproof 
construction  worth  several  hundred  thousands  of 
dollars  as  for  a  row  of  old  shacks  worth  almost 
nothing.  Police  protection  costs  relatively  little 
for  vacant  lots,  or  land  as  such,  in  general.  It 
does  bear  some  direct,  though  by  no  means  exact, 
proportion  to  the  value  of  buildings  and  other 
property.  Still,  considering  the  whole  situation, 
we  find  that  a  tax  in  proportion  to  the  value  of 
property  relates  itself  to  the  cost  of  rendering  the 
service  on  account  of  the  property. 

One  further  reason  for  taxing  according  to  the 
value  of  property  involves  something  besides  all 
the  reasons  given  of  the  various  costs  to  the  com- 
munity on  account  of  property.  It  is  the  very 
fact  that  the  community  maintains  the  institu- 
tion of  private  property.  Though  it  does  so  as  a 


WHAT   SHALL   BE  TAXED?  29 

matter  of  social  utility,  because  it  believes  the 
private  ownership  of  most  property  more  advan- 
tageous to  the  community  than  public  ownership, 
nevertheless,  in  maintaining  private  property  as 
an  institution,  it  does  especially  benefit  the 
owners  of  the  property.  So  for  this  general  reason 
it  seems  fitting  that  taxes  should  be  levied  largely 
according  to  the  value  of  property  owned  and, 
incidentally,  that  the  theory  of  ability  meet  with 
some  further  limitation  on  this  account. 

Some  public  expendihires  are  not  on  account 
of  property 

One  of  the  largest  of  our  public  expenditures, 
that  for  schools,  does  no  direct  service  at  all  to 
the  property  owner  as  such.  Expenses  for  main- 
taining the  poor,  for  hospitals,  for  safeguarding 
the  public  health  have  no  direct  relation  to  the 
property  owner.  These  public  activities  benefit 
a  man  as  a  property  owner  only  in  indirect, 
remote  wavs,  negligible  for  our  purpose.  More- 
over, the  sole  consideration  of  the  State  in  under- 
taking the  expense  of  education,  for  example, 
is  to  free  the  direct  beneficiary  from  bearing  the 
cost.  If  the  direct  beneficiary  does  not  bear  the 
expense,  who  will?  The  community  answers  that 
each  member  of  the  community  shall  bear  it 
according  to  his  ability. 

Why  do  we  get  this  answer?  It  rests  on  a  moral 


30         PRINCIPLES  OF  TAXATION 

doctrine  of  altruism  which  says  that  each  man 
owes  service  to  the  community  according  to  his 
ability.  This  in  turn  rests  on  the  basis  that  the 
ultimate  progress  and  happiness  of  the  individual 
is  so  intimately  related  to  the  progress  and  hap- 
piness of  the  group,  that  each  depends  on  the 
other.  In  levying  taxes  according  to  ability  the 
community  says  it  will,  through  its  organization, 
the  State,  exact  this  much  from  the  individual. 
Outside  of  this  exaction  it  leaves  the  matter  as 
one  of  private  morals. . 


CHAPTER  III 

SHOULD   ALL   PROPERTY   BE   TAXED  ALIKE? 

We  have  come,  then,  to  the  general  conclusion 
that  the  value  of  property  aflfords  a  sound  basis  for 
levying  a  large  part  of  our  taxes.  So  far  in  dis- 
cussing our  subject  we  have  indicated  as  little  as 
possible  that  there  are  various  classes  of  property. 

Property  and  wealth  not  synonymous 

Before  going  further  we  must  recognize  the 
fact  that  the  term  "property"  is  a  legal  rather 
than  an  economic  term.  Yet  we  are  discussing 
taxation  primarily  as  an  economic  rather  than  as 
a  legal  matter.  Much  of  our  practice  in  taxation 
has  confused  the  legal  word  "property"  with  the 
economic  word  "wealth,"  and  has  gone  ahead 
as  if  they  were  synonymous.  Much  of  the  com- 
mon misconception  of  taxation  matters  rises  out 
of  an  unconscious  assumption  that  wealth  in  its 
technical  economic  sense  is  the  same  thing  as 
wealth  in  popular  meaning. 

In  order  to  facilitate  our  discussion  we  will  not 
attempt  to  stick  to  the  economic  distinction  of 
land  and  capital,  except  when  considering  some 
such  matter  as  the  proposal  to  tax  land  exclu- 


32        PRINCIPLES  OF  TAXATION 

sively  or  at  a  different  rate  from  capital,  which 
requires  us  to  recognize  the  distinction.  Other- 
wise we  are  discussing  the  taxation  of  wealth, 
and  from  both  the  popular  and  accounting  stand- 
point, all  wealth  used  in  production,  whether 
capital  in  the  economic  sense  or  land,  is  capital, 
and  we  shall  speak  of  it  as  such. 

The  legal  term  "property"  covers  a  great  deal 
that  has  nothing  to  do  with  the  economic  term 
"wealth."  In  any  precise  sense,  useful  for 
economic  thinking,  wealth  means  always  some 
material  thing.  Houses,  lands,  cattle,  tools, 
machinery,  factories,  jewels,  paintings  constitute 
wealth.  Ownership  of  all  these  things  comes 
within  the  term  "property,"  but  property  covers 
many  things  that  are  not  wealth  at  all.  If  Smith 
owes  Jones  $1000,  Jones  has  a  right  against 
Smith  and  Smith  owes  an  obligation  to  Jones 
that  constitutes  property.  Jones  owns  this  prop- 
erty. The  fact  that  Smith  owes  Jones  does  not 
constitute  wealth  at  all.  Otherwise  a  group  of 
people,  sitting  in  a  room  together,  say,  could 
become  wealthy  far  "beyond  the  dreams  of 
avarice"  by  solemnly  making  mutual  promises  to 
each  other.  In  this  way  a  nation  could  increase 
its  wealth  to  any  extent.  Yet  most  of  our  tax 
practice  has  gone  on  the  assumption  that  such 
promises  create  wealth,  and  has  purported  to 
treat  them  just  as  if  they  were  actual  wealth. 


EQUALITY  OF  TAXATION  33 

Different  forms  of  property  impose  different 
amounts  oj  public  cost 

If  a  man  has  a  right  to  receive  a  sum  of  money, 
is  a  creditor,  he  undoubtedly  owns  property  in  a 
legal  sense.  Does  any  of  our  argument  in  the 
preceding  discussion  about  the  cost  of  govern- 
ment activities  in  relation  to  property  apply  to 
this  kind  of  property?  If  any  of  it  applies,  how 
much?  The  construction  and  maintenance  of 
highways  certainly  has  nothing  to  do  with  this 
kind  of  property.  A  road  has  no  effect  on  a  debt. 
Expenditures  for  fire  protection  do  not  benefit 
a  debt.  The  protection  of  policemen,  whether  in 
uniform  or  in  plain  clothes,  does  not  extend  to 
the  debt  itself.  In  each  of  these  instances,  of 
course,  I  refer  to  the  debt  as  such.  These  things 
are  done  with  regard  to  the  tangible  property 
irrespective  of  whether  or  not  it  stands  in  any 
way  as  security  for  the  debt.  They  have  no 
reference  to  the  debt  itself.  In  a  large  measure 
the  evidence  of  a  debt  may  be  stolen  without  in- 
juring the  creditor's  right,  which  is  his  property. 
In  the  cost  of  police  protection  to  the  evidences 
of  these  rights,  their  creation  and  ownership 
does  impose  some  expense  on  the  Government. 
Especially  part  of  the  cost  of  maintaining  the 
courts  in  which  these  rights  may  be  enforced  is 
chargeable   to   them.     So   on   the   principle   of 


34         PRINCIPLES   OF  TAXATION 

taxing  according  to  the  cost  of  the  pubhc  service 
performed,  we  find  that  something  should  be 
taxed  to  the  owners  of  riglits  of  this  kind.  Most 
of  the  great  public  expenses  incurred  in  connec- 
tion with  property  we  have  seen  have  nothing 
to  do  with  this  kind  of  property. 

Do  all  forms  of  property  equally  give  ability 
to  pay? 

When  we  come  to  the  test  of  ability  to  pay  we 
raise  an  issue  impossible  to  discuss  in  so  brief  a 
way.  Certainly  a  man  who  receives  an  income  of 
$5000  from  debts  owing  him  is  able  to  pay  just 
as  much  as  the  man  who  receives  an  income  of 
$5000  in  rent  from  real  estate  which  he  owns. 
Both  receive  an  income,  not  dependent  like  earn- 
ings, on  a  continuance  of  life  and  health.  It  seems 
in  all  respects  in  which  generally  men  should 
bear  the  public  burden  according  to  their  ability 
that  these  men  should  pay  taxes  alike.  On  hasty 
thought  that  seems  the  logical  conclusion. 

New  considerations  in  taxation 

Other  considerations  come  in  at  this  point  to 
make  a  change  in  the  direction  of  our  line  of 
thought.  In  fact,  our  discussion  has  already  gone 
far  enough  to  show  that  the  line  of  thought  in 
taxation  is  likely  to  be  the  result  of  more  forces 
than  the  most  complex  astronomical  orbit.    We 


EQUALITY  OF  TAXATION  35 


said  early  in  ourargument'that  taxation  consists 
/^"taTohg  a  certain  part  of  the  privately  owned 
I  wealth  and  transferring  it  to  public  ownership  in 
'i  order  that  it  may  be  used  in  the  public  undertak- 
';  ings.  ySince  this  is  a  continuous  process,  taxes 
must  come  out  of  the  economic  income  of  the 
community.    There  can  be  a  continuous  trans- 
ference of  wealth  only  as  there  is  a  continuous 
creation  of  wealth.  But  a  debt  is  not  wealth  and 
does  not  create  wealth. 

A  credit  is  neither  la^id,  labor,  nor  economic 

capital 

Land,  labor,  and  capital  economists  state  as 
the  elements  entering  into  the  production  of 
wealth.  In  the  economic  use  of  the  word,  "capi- 
tal" consists  of  wealth,  tangible  things,  buildings, 
machinery,  tools,  food,  clothing,  used  or  con- 
sumed in  the  process  of  the  production  or  crea- 
tion of  wealth.  These  things,  land,  labor,  and 
capital  together,  produce  all  the  "ability  to  pay" 
there  is.  Though  from  an  individual  standpoint, 
if  Smith  has  an  income  of  $5000  from  interest  on 
debts  due  him,  and  Jones  an  income  of  $5000  from 
the  rent  of  land  he  owns,  both  are  equally  able  to 
pay;  nevertheless,  from  the  community  stand- 
point, to  tax  them  both  alike  taxes  the  com- 
munity as  a  whole  on  an  absolutely  fictitious 
ability  to  pay.    Suppose  the  value  of  the  land 


36        PRINCIPLES  OF  TAXATION 

and  other  tangible  property  of  a  community  is 
$2,000,000  and  the  citizens  of  that  community 
owe  each  other  debts  to  the  amount  of  $1,000,000. 
Conceivably  this  entire  debt  might  be  liquidated 
and  the  productive  power  of  the  community,  its 
ability  to  pay,  not  be  diminished  in  the  least. 
The  same  amount  of  land,  labor,  and  capital 
would  be  there  as  before.  All  that  would  happen 
would  be  that  the  legal  titles  to  the  land  and 
capital  would  be  somewhat  rearranged. 

Taxing  credits  taxes  a  method  of  doing  business 

When  a  community  taxes  credits  it  does  not 
tax  wealth  at  all,  but  a  method  of  doing  business. 
It  is  taxing  the  method  of  conducting  business  on 
credits.  The  community  approves  this  form  of 
doing  business  by  giving  it  the  full  benefit  and 
protection  of  its  legal  machinery.  Apparently, 
the  community  does  not  levy  a  tax  on  it  in  order 
to  discourage  it  by  a  penalty. 

A  form  of  business  may  add  to  productiveness 

Though  we  have  mentioned  the  possibility  of 
liquidating  the  indebtedness  of  a  particular  com- 
munity without  decreasing  its  productive  power 
in  the  least,  presumably  this  is  not  true  of  all 
indebtedness.  Doing  business  by  means  of  cred- 
its is  advocated  as  increasing  somewhat  the 
productiveness  of  a  community.   It  is  stated  that 


EQUALITY  OF  TAXATION  37 

credits  tend  to  place  the  capital  of  the  community 
in  the  control  of  those  able  to  make  the  most 
productive  use  of  it.  Certainly  they  do  not  aver 
age  to  increase  productiveness  lOO  per  cent.  A 
defense  of  the  taxation  of  credits  at  the  same  rate 
as  tangible  property  must  make  that  assumption 
in  so  far  as  the  rate  is  based  on  any  real  ability 
to  pay. 

Capital  commands  a  uniform  rate  of  return 

A  concrete  example  will  show  that  the  taxation 
of  credits  taxes  a  form  of  doing  business.  Ability 
to  lend  implies  control  over  the  use  of  capital. 
Enough  capital  can  be  diverted  from  one  use  to 
another,  and  the  possible  uses  are  so  various  at 
any  time  that,  leaving  out  of  consideration  the 
matter  of  risk,  the  control  of  capital  commands 
a  uniform  rate  of  return.  If  Brown  has  $10,000 
and  can  buy  a  house  which  he  can  rent  to  give 
him  a  real  net  return  of  4  per  cent  after  making 
a  proper  allowance  for  risk,  depreciation,  man- 
agement, and  everything  else,  he  will  not  lend 
that  $10,000  to  Robinson  for  a  net  return  of  less 
than  4  per  cent.  If  the  community  will  tax 
Brown  2  per  cent  on  the  debt  Robinson  will  owe 
him.  Brown  will  charge  Robinson  6  per  cent  for 
the  loan;  but  if  the  community  will  not  levy  any 
tax  at  all,  Brown  will  let  Robinson  have  the  loan 
for  4  per  cent. 


38         PRINCIPLES   OF  TAXATION 

Illustration  of  taxing  a  business  method 

Suppose  Robinson  has  $10,000  himself,  and 
wants  to  borrow  the  other  $10,000  and  buy  a 
$20,000  farm  neighboring  to  a  farm  owned  by 
Jones,  free  and  clear  of  all  debt  and  worth 
$20,000.  Assume  that  Jones  and  Robinson  are  of 
equal  ability  as  farmers,  and  that  each  should 
get  a  return  of  $1200  for  his  work  as  a  farmer. 
Since  the  farmers  are  of  equal  ability  and  the 
farms  of  equal  value,  suppose  each  farm  produces 
a  return  of  $2000.  Jones  then  gets  a  capital  return 
of  4  per  cent  on  his  capital  investment  and  $1206 
for  his  ability  as  a  farmer.  Robinson  must  pay 
$600  in  interest.  If  we  allow  him  4  per  cent  on  his 
capital  investment  of  $10,000,  or  $400,  we  leave 
him  only  $1000  for  his  work  as  a  farmer,  or  $200 
less  than  Jones,  a  man  of  no  greater  ability.  By 
taxing  credits  we  have  taxed  Jones's  form  of 
doing  business  and  heavily  penalized  him  for 
being  a  poor  man.  By  seeming  to  tax  the  creditor 
according  to  his  apparent  individual  ability,  the 
community  really  taxes  the  debtor  all  out  of 
proportion  to  the  debtor's  ability. 

So  it  appears  that  the  community  cannot  fairly 
tax  according  to  property  in  the  legal  sense,  but 
must  in  any  taxation  of  property  tax  substantially 
according  to  wealth  in  the  economic  sense.  Some 
writers  speak  of  this  as  a  taxation  of  production. 


EQUALITY   OF  TAX.\TION  39 

It  does  tax  one  element  of  production,  capital. 
Since  taxes  must  be  paid  out  of  wealth,  to  bear 
any  relation  to  ability  to  pay  they  must  in  some 
way  relate  to  production.  We  should  notice,  how- 
ever, that  taxation  of  wealth  extends  to  a  some- 
what broader  area  than  taxation  of  capital, 
which  is  wealth  used  in  production.  It  covers 
wealth  not  used  in  production,  ornamental 
jewels,  pleasure  vehicles,  costly  habitations, 
ever>'thing  not  essential  to  our  annual  produc- 
tion. In  the  taxation  of  unproductive  wealth  of 
this  kind,  the  nature  of  the  tax  really  shifts  from 
a  tax  on  production  to  a  tax  on  consumption. 

Incidence  oj  taxation  of  credits  falls  on  the 
debtor  and  stays  on  him 

Through  the  shifting  of  the  incidence  of  taxa- 
tion, any  tax  which  is  evenly  levied  on  the  cap- 
ital employed  in  a  given  line  of  production  comes 
out  of  the  ultimate  consumer  of  the  product.  If 
all  producers  of  a  given  product  have  to  pay  the 
same  amount  of  tax  on  the  capital  employed  in 
their  business,  they  will  simply  add  the  tax  to 
the  price  charged  for  the  product.  The  producer 
can  charge  the  tax  to  the  consumer  only  when  all 
other  producers  of  the  same  commodity  pay  a 
tax  at  as  high  a  rate  as  his.  To  test  this,  let  us  go 
back  to  Jones,  who  owns  a  $20,000  farm  clear 
and  free  of  debt,  and   Robinson,  who  owns  a 


40         PRINCIPLES  OF  TAXATION 

$20,000  farm  with  a  $10,000  mortgage  on  it. 
Because  the  community  levies  a  tax  of  $200  on 
the  man  who  loans  $10,000  to  Robinson,  the 
lender  must  charge  $200  more  than  he  would  if 
he  did  not  have  to  pay  any  tax.  Robinson  pays 
directly  the  tax  on  his  farm  of  the  value  of 
$20,000,  and  indirectly  the  tax  of  2  per  cent  on 
the  debt  of  $10,000.  Suppose  both  Jones  and 
Robinson  are  taxed  2  per  cent  on  a  valuation  of 
$20,000  on  their  farms.  Jones  then  pays  a  tax  of 
$400,  but  Robinson  pays  a  tax,  directly  and  in- 
directly, of  $600.  Let  us  assume  that  both  pro- 
duce only  milk,  and  that  they  supply  all  the 
milk  used  in  a  near-by  manufacturing  town. 
Obviously  Robinson  cannot  charge  more  for  his 
milk  than  Jones,  and  cannot  add  his  extra  $200 
of  taxes  to  the  price  he  charges  the  consumer. 

Thirty  thousand  dollars  property,  hut  only 
twenty  thousand  dollars  of  wealth 

Such  a  situation  as  Robinson's  borrowing 
$10,000  from  Smith  in  order  to  buy  a  $20,000 
farm  comes  down  to  the  fact  that  Smith  and 
Robinson  each  have  $10,000  of  capital  invested 
in  the  same  farming  enterprise.  This  comprises 
the  total  value  of  $20,000  of  wealth  to  be  taxed. 
The  business  arrangement  between  the  parties 
as  to  who  is  to  conduct  the  enterprise,  in  what 
way  the  risk  is  to  be  borne,  and  the  whole  legal 


EQUALITY   OF  TAXATION  41 

superstructure  of  title,  mortgage,  equity  of 
redemption,  etc.,  around  the  transaction,  have 
nothing  to  do  with  taxation.  Both  own  an  equal 
amount  of  wealth,  impose  equal  costs  on  the 
Government,  and,  assuming  that  this  investment 
represents  the  entire  wealth  that  each  owns, 
each,  so  far  as  his  wealth  goes,  has  an  equal 
ability  to  pay.  Jones,  having  an  investment  all 
his  own  of  $20,000  in  a  neighboring  farm,  costs 
the  Government  as  much  as,  and  has  an  ability 
to  pay  equal  to,  Robinson  and  Smith  together. 
If  the  same  amount  of  taxes  is  paid  out  of  the 
products  of  each  farm,  all  three  have  come  out 
square  with  the  Government. 

The  corporate  form  of  enterprise  also  creates 
property  representatives  of  wealth 

Exactly  the  same  economic  situation  arises 
with  capital  invested  in  an  enterprise  conducted 
under  the  corporate  form.  Robinson  in  buying  a 
farm  by  means  of  borrowing  takes  advantage  of 
a  means  society  has  devised  for  the  mutual  bene- 
fit of  both  Robinson  and  the  lender.  Smith. 
Without  this  means  Robinson  could  not  engage 
in  business  on  so  large  a  scale  and  would  not  have 
a  chance  to  use  his  abilities  to  so  great  an  advan- 
tage. Smith  would  be  obliged  to  put  time  and 
energy  into  managing  his  own  business,  or,  in  any 
event,  if  he  employed  a  manager  he  would  have 


42         PRINCIPLES  OF  TAXATION 

to  assume  the  risk  of  the  enterprise,  in  order  to 
gain  any  income  from  the  use  of  his  wealth.  The 
corporate  form  of  doing  business  is  simply 
another  device  of  society  to  give  the  individual 
a  greater  freedom  of  action.  People  use  their 
wealth  in  an  economic  way  through  the  machin- 
ery of  this  device.  Obviously,  if  Jones,  who  owns 
his  $20,cxx)  farm  free  and  clear,  decides  to  take 
advantage  of  the  opportunity  the  law  affords 
him  of  turning  his  business,  now  under  his  direct 
personal  ownership,  into  a  corporation,  and 
organizes  the  Meadowbrook  Dairy  Company,  to 
which  he  turns  over  his  farm  and  takes  stock  of 
the  par  value  of  $20,000,  he  has  not  increased  the 
wealth  of  the  community  at  all.  Wealth  to  the 
value  of  $20,000  is  still  there,  and  nothing  more 
whatever.  If  he  decides  to  retire  and  disposes  of 
his  corporate  stock,  $5000  each  to  Brown,  John- 
son, Davis,  and  Roe,  he  does  not  change  in  the 
least  the  amount  of  wealth  in  the  community. 
There  is  just  $20,000  worth  of  wealth  invested 
in  dairying. 

Ownership  under  the  corporate  form  cannot  shift 
the  incidence  of  taxation  greater  than  taxation 
of  individual  ownership 

Now  assume  that  the  community  taxes  the 
corporation  for  the  value  of  its  farm  on  $20,000 
at  the  rate  of  2  per  cent  and  taxes  each  of  the 


EQUALITY   OF  TAXATION  43 

shareholders  at  the  rate  of  2  per  cent  on  the  value 
of  their  corporate  stock.  The  corporation  pays 
$400  in  taxes  and  the  shareholders  pay  $400  in 
taxes,  or  a  total  payment  of  taxes  which  must 
be  made  out  of  the  earnings  of  the  farm  of 
$800. 

Following  through  the  same  argument  as  in 
the  case  of  the  debtor  and  creditor,  consider 
Robinson,  who,  we  will  now  assume,  to  simplify 
the  illustration,  owns  his  $20,000  farm  free  from 
debt.  Let  us  have  the  corporation  hire  Jones  as  a 
manager  at  a  salary  of  $1200.  Jones  and  Robin- 
son, we  remember,  are  men  of  the  same  ability  as 
farmers.  Without  taking  out  taxes  or  paying 
Jones  a  salary,  or  allowing  Robinson  anything 
for  his  labor,  the  product  of  each  farm  brings 
$2500  net.  Since  Robinson  has  produced  exactly 
the  same  results  as  Jones,  his  labor  is  worth  the 
same  as  Jones's,  or  $1200.  This  reduces  the 
return  from  the  farm  to  $1300.  Robinson  pays 
$400  in  taxes,  and  has  left  a  return  of  $900  on  his 
capital  investment,  or  4.5  per  cent.  How  do  the 
Meadowbrook  Farm  people  come  out?  After 
paying  Jones's  salary  they  have  left  $1300.  The 
corporation  pays  $400  in  taxes  and  has  $900  to 
distribute  in  dividends  to  the  shareholders. 
They  have  to  pay  a  total  of  $400  more  in  taxes, 
leaving  an  actual  return  on  capital  of  $500,  or 
2.5  per  cent. 


44        PRINCIPLES   OF  TAXATION 

Bank  deposits  and  capital 

So,inthesameway,taxingbankdepositsineffect 
taxes  bank  loans  and  those  people  who  take  advan- 
tage of  such  loans  in  financing  their  enterprises. 

Since  banks  invest  their  capital  in  the  same  way 
as  they  invest  their  loans,  the  same  reasoning 
applies.  Of  course,  in  so  far  as  they  invest  in 
land,  building,  or  other  forms  of  tangible  prop- 
erty, such  property  should  be  taxed  the  same  as 
any  other  property  of  like  kind. 

Our  argument  does  not  lead  to  the  conclusion  that 
representative  forms  of  property  should  not  he 
taxed  at  all 

Our  argument  does  not  lead  to  the  conclusion 
that  the  community  should  not  tax  at  all  those 
forms  of  property  which  represent  wealth,  but 
are  not  themselves  wealth  in  the  ordinary  use 
of  the  word  in  economic  discussion.  Though  the 
community  does  not  incur  anything  like  the  cost 
on  account  of  the  representative  that  it  incurs  on 
account  of  the  property  represented,  it  does, 
nevertheless,  undergo  some  extra  expense  on 
account  of  enterprises  which  make  use  of  those 
business  methods  producing  representative  forms 
of  property  as  compared  with  those  forms  of 
enterprise  which  do  not  make  use  of  representa- 
tive forms  of  property.  It  has  all  the  expense  im- 


EQUALITY  OF  TAXATION  45 

posed  by  directly  owned  or  other  "unrepresented" 
property,  and  such  relatively  slight  expenses  as 
the  addition  of  the  representative  form  implies. 

To  tax  these  representative  forms  of  property 
inevitably  taxes  those  enterprises  which  make 
use  of  such  representative  forms.  Capital  always 
has  a  choice  between  going  into  a  loan  and  going 
into  the  direct  ownership  of  tangible  property. 
It  always  has  the  choice  between  going  into 
enterprises  in  the  corporate  form  and  those  not 
in  the  corporate  form.  These  forms  of  enterprise 
compete  with  each  other  for  capital.  After  mak- 
ing allowance  for  the  estimate  of  risk,  capital  as 
such  has  absolutely  one  price.  Though  this  price 
may  vary  from  hour  to  hour,  at  any  given 
moment  it  is  exactly  uniform.  To  tax  capital 
because  it  goes  into  any  particular  machinery  of 
business,  credits,  the  corporation,  taxes  that 
particular  form  of  conducting  enterprise.  Some 
small  expense  for  police  protection  of  whatever 
tangible  form  in  the  piece  of  paper  that  the 
property  takes,  —  note,  bond,  share  of  stock,  or 
whatever,  —  and  a  relatively  larger  part  of  the 
expense  of  maintaining  the  courts  in  which  the 
rights  are  enforced,  make  the  entire  expense  this 
form  of  property  imposes  on  the  community. 

We  might  not  come  to  the  conclusion,  either, 
that  these  small  costs  to  the  Government  com- 
prise absolutely  the  only  amount  which  the  com- 


46         PRINCIPLES   OF  TAXATION 

munity  may  properly  tax  to  the  owner  of  intangi- 
bles, and  so,  back  to  the  enterprise  which  gives 
rise  to  their  issuance.  Though  a  method  of  doing 
business,  as  by  the  credit  system  or  the  corporate 
form,  is  not  capital  in  any  sense,  economic  or 
other,  it  may,  nevertheless,  enable  a  given  indi- 
vidual, or  group  of  individuals,  to  produce  more 
than  would  be  possible  without  it.  We  should  not 
jump  to  a  hasty  conclusion,  however,  from  an 
application  to  taxation  of  part  of  the  theory  of 
trading  on  the  equity,  that  is,  of  doing  business 
on  borrowed  money. 

Most  of  the  appareyit  gains  from  borrowing 
represent  risk 

Suppose  Brown  has  a  farm  worth  $10,000,  from 
which  he  is  able  to  make  $800,  after  allowing 
himself  $1200  for  his  labor,  or  he  makes,  say, 
8  per  cent  on  his  capital.  Assume  further  that  he 
borrows  $10,000  at  6  per  cent,  and  is  able  to 
increase  the  net  earnings  from  his  farming  opera- 
tions by  $QOO,  so  that  they  now  total  $1700  on  a 
capital  invested  in  the  enterprise  of  $20,000,  or 
8.5  per  cent.  Since  he  must  pay  interest  of  $600, 
the  net  returns  to  him  are  $1100.  Borrowing  at 
6  per  cent  and  making  a  return  of  8.5  per  cent, 
he  is,  we  must  presume,  assuming  a  risk  equiva- 
lent to  2.5  per  cent  on  the  new  capital,  or  $250, 
and  that  he  has  thrust  an  additional  risk  of  .5  per 


EQUALITY   OF  TAXATION  47 

cent,  or  $50,  on  his  old  capital,  a  total  of  $300, 
or  all  his  seeming  gains,  he  must  count  as  pre- 
mium for  risk  he  has  assumed.  Though  all  this 
reasoning  is,  of  course,  pure  theory,  it  probably 
comes  very  near  the  truth  of  the  facts,  which 
in  themselves  are  not  absolutely  establishable. 
Apparently  the  credit  form  of  doing  business  does 
little  for  a  man  from  an  economic  standpoint 
but  put  him  in  a  position  to  make  some  extra 
advantage  out  of  his  business  skill  by  being  an 
insurer  of  business  risks,  and  so,  in  some  measure, 
increases  his  ability. 

The  corporate  form  may  to  some  extent  enable  a 
more  profitable  employment  of  capital  because  of 
conducting  business  on  a  large  scale 

Doubtless  some  kinds  of  enterprise  can  be 
carried  on  more  profitably  on  a  large  than  on  a 
small  scale,  and  some  kinds  of  enterprise  can  be 
undertaken  only  on  a  large  scale.  From  this 
standpoint  the  corporate  form,  which  especially 
enables  the  aggregation  of  capital  necessary  for 
the  conduct  of  business  on  a  large  scale,  may  be 
said  also  in  some  degree  to  increase  ability  to  pay. 
Obviously,  this  increase  does  not  lend  itself  to 
measurement  as  an  actual  fact  or  to  theoretical 
calculation.  Certainly  it  seems  an  unsound  basis 
for  any  but  slight  taxation. 

This  consideration  of  possible  greater  profit- 


48         PRINCIPLES   OF  TAXATION 

ableness  of  enterprise  because  of  the  use  of  some 
representative  form  of  property  in  carrying  it 
on  is  too  conjectural  a  matter  to  afford  a  sound 
basis  for  taxation  of  any  consequence.  It  has 
been  mentioned  simply  to  show  that  it  has  been 
given  consideration.  Except  for  the  case  of  the 
magnitude  of  corporate  enterprise,  it  is  based  on 
special  personal  productive  capacity,  or  business 
skill,  and  is  not  fair  unless  other  special  personal 
productive  capacity  is  also  taxed. 

In  so  far  as  the  machinery  of  indirect  owner- 
ship in  its  various  forms  may  tend  to  bring  the 
management  of  wealth  into  more  skilful  hands, 
we  should  rely,  to  reach  that  special  ability  to 
pay  taxes,  on  whatever  means  may  be  devised 
for  reaching  the  ability  to  pay,  due  to  more 
skilful  management  of  directly  owned  wealth  as 
compared  with  the  less  skilful  managment  of 
indirectly  owned  wealth. 

In  taxation  of  intangibles  not  forced  to  fall  hack  on 
the  principle  of  what  the  traffic  will  hear 

People  often  discuss  the  matter  of  the  taxation 
of  intangible  property  from  the  "practical" 
viewpoint  of  experience  without  going  into  the 
economic  questions  involved.  They  usually 
advocate  taxation  at  as  low  a  rate  as  the  traffic 
will  bear  and  produce  a  maximum  of  revenue. 
Our  multiplicity  of  taxing  jurisdictions  in  the 


EQUALITY  OF  TAXATION  49 

United  States,  with  their  diversity  of  laws,  adds 
to  the  difficulties  of  assessment  and  collection  of 
taxes  on  intangibles.  It  seems  hardly  necessary, 
however,  to  fall  back  in  this  matter,  without  other 
recourse,  on  a  doctrine  of  expediency  that  dis- 
regards any  question  of  fairness. 

In  answering  the  question  as  to  whether  all 
classes  of  property  should  be  taxed  at  the  same 
rate,  we  have  so  far  considered  only  the  division 
of  property  into  tangible  and  intangible.  What 
has  been  said  indicates  that  there  seems  no  basis 
for  a  difference  betw^een  privately  created  intangi- 
bles such  as  credits  and  stocks.  Whether  the 
public  debt,  municipal  and  state  bonds,  afford  a 
basis  for  a  difference  raises  considerations  that 
we  will  not  take  up  at  length.  Omitting  from  the 
argument  the  fact  of  a  multiplicity  of  taxing 
jurisdictions,  it  would  be  absurd  for  a  municipal- 
ity, say,  to  tax  its  own  bonds.  Whether  the  fact 
that  a  city's  bonds  are  not  necessarily  all  owned 
by  its  citizens  makes  any  difference,  we  will 
leave  for  later  discussion.  Let  us  now  consider 
whether  tangible  property  should  be  separated 
into  classes  for  purposes  of  taxation. 

Should  tangible  property  he  classified  for  taxation 
at  different  rates? 

Should  the  community  distinguish  between 
real  and  tangible  personal  property  in  taxation? 


50         PRINCIPLES  OF  TAXATION 

In  answering  this  question,  let  us  consider  one  at 
a  time  various  classes  of  tangible  personal  prop- 
erty. Though  all  kinds  of  wealth,  excepting  bare 
space  of  the  earth,  is  in  the  process  of  consump- 
tion, some  kinds  are  being  consumed  much  more 
rapidly  than  others.  So  it  is  possible  to  distin- 
guish tangible  personal  property  on  this  basis. 
As  a  practical  matter,  accountants  do  classify  it 
this  way  as  permanent  assets  and  quick  assets. 

The  difference  between  permanent  assets  in 
the  form  of  buildings  and  permanent  assets  in 
the  form  of  personal  property  —  for  example,  a 
harvesting  machine  —  does  not  afford  a  ground 
of  distinction  in  taxation.  On  the  test  of  cost 
to  the  Government,  both  impose  about  equal 
charges.  Highways,  police  and  fire  protection, 
the  machinery  of  the  courts  contribute  to  both. 
On  the  test  of  ability  to  pay  both  are  on  the  same 
basis.  Each  contributes  to  productive  power, 
and  the  market  price  of  any  particular  piece  of 
property  measures  the  value  of  that  contribu- 
tion. It  is  true  that  the  harvester  will  probably 
be  consumed  much  sooner  than  the  building. 
The  market  price,  however,  takes  that  fact  into 
consideration. 

The  same  argument  applies  to  quick  assets, 
both  on  the  test  of  cost  to  the  Government  and 
on  the  test  of  ability  to  pay,  and  no  difference 
appears  between  goods  in  the  course  of  manu- 


EQUALITY  OF  TAXATION  51 

facture  and  goods  otherwise  on  their  way  to  con- 
sumption. A  merchant's  stock  of  goods  may  seem 
to  call  for  special  consideration.  Such  a  stock, 
however,  is  capital  invested  in  the  business  of 
creating  time  and  place  values  in  merchandise. 
Such  values  are  just  as  real  and  constitute  a 
production  of  wealth  just  as  truly  as  the  creation 
of  form  values.  No  reason  appears  in  the  nature 
of  the  property  for  treating  stocks  of  trade  differ- 
ently from  other  forms  of  tangible  property  we 
have  been  considering. 

This  consideration  of  whether  tangible  prop- 
erty should  be  classified  for  taxation  at  difTercnt 
rates  is  not  intended  to  be  exhaustive,  but  simply 
to  indicate  some  general  principles.  Special  con- 
siderations may  arise  in  certain  cases.  Growing 
timber,  for  example,  cannot  stand  taxation  at 
the  same  rate  as  other  real  estate. ^   Automobiles, 

1  It  seems  as  if  there  must  be  a  failure  to  realize  how 
heavily  the  regular  rate  of  taxation,  if  enforced,  counts 
against  the  long-delayed  returns  of  the  timberland,  or  else 
such  property  would  be  considered  rather  a  liability  than  an 
asset.  To  show  the  effect  of  an  annual  payment  of  a  tax 
without  having  an  annual  return  to  pay  it  out  of,  I  have 
worked  out  a  problem.  This  problem  simply  shows  how 
much  paid  for  taxes  each  year  would  amount  to  if  invested 
in  something  bringing  a  current  income.  The  sum  is  offset 
against  the  annual  increase  in  the  value  of  the  property, 
which  is  assumed  to  be  the  total  increase  in  value  divided 
by  the  number  of  years  to  get  the  increase.  A  glance  shows 
in  how  few  years  the  increase  in  value  equals  or  exceeds  the 
compounded  tax  for  the  year.    The  problem  states  condi- 


52         PRINCIPLES  OF  TAXATION 

which  are  imposing  very  heavy  costs  on  account 
of  highways,  might  be  taxed  higher  than  other 
forms  of  property,  on  the  principle  of  taxing 
according  to  cost  imposed  on  the  public  organiza- 
tion. 

The  taxation  of  wealth  not  used  in  production 

Our  argument  so  far  has  neglected  wealth  not 
used  in  production.  Ornaments,  habitations 
larger  and  more  expensive  than  necessary  for 
health  and  comfort,  automobiles  and  yachts 
used  for  pleasure  would  come  into  this  class  of 
property.  On  the  test  of  cost  to  the  State  this 
class  of  property  should  be  taxed  on  the  same 
basis  as  any  other.  The  test  of  ability  to  pay 
does  not  apply.  By  the  very  definition  of  the  class 
it  is  wealth  not  used  productively  and  not  creat- 

tions  perhaps  fairly  typical  for  northern  New  England,  ex- 
cept that  the  tax  rate  is  made,  for  the  sake  of  even  figures, 
probably  a  little  high.  The  statement  is  made  to  show  the 
principle  rather  than  to  reach  an  exact  conclusion  of  profit 
or  loss.  It  should  be  noted  that  the  results  show  only  the 
effect  of  taxation,  and  do  not  show  the  loss  from  compound- 
ing the  original  investment. 

Problem  on  timberland  tax 

Assume  that  one  thousand  acres  of  spruce  seedling  land 
are  bought  at  $3  an  acre,  and  held  for  forty  years,  at  which 
time  the  land  will  cut  a  little  over  seven  cords  of  pulp-wood 
an  acre,  at  a  value  of  $6  a  cord  stumpage,  or  a  value  of,  say, 
$43  an  acre.  Assume  that  2  per  cent  taxes  are  paid  during 
the  forty  years.    Following  is  the  statistical  result:  — 


EQUALITY  OF  TAXATION 


53 


ing  ability  to  pay.   Inasmuch  as  it  is  ordinarily  a 
source  of  private  as  well  as  of  public  expense,  far 


Value' 

Term 

Value  of 
tax  com- 
pounded at 
6  per  cent. 

Year. 

of 
land. 

Tax  rate. 

Tax. 

to 
run. 

I 

$3,000 

2  per  cent 

$60 

40  years 

J617.14 

2 

4,000 

*' 

80 

39 

776.28 

3 

S.ooo 

** 

100 

38 

915.42 

4 

6,000 

'* 

120 

37 

1,926.23 

S 

7,000 

** 

140 

36 

1. 140.40 

6 

8,000 

** 

160 

35 

1,229.77 

7 

9,000 

41 

180 

34 

1,305.18 

18 

10,000 

** 

200 

33 

1,308.12 

9 

11,000 

** 

220 

32 

1,429.74 

fo 

12,000 

** 

240 

31 

1,461.14 

II 

13,000 

** 

260 

30 

1.493 .3 1 

12 

14,000 

** 

280 

29 

1, 518. IS 

13 

15,000 

** 

300 

28 

1,533.51 

14 

16,000 

** 

320 

27 

1. 543-13 

IS 

17,000 

** 

340 

26 

1,546.79 

i6 

18,000 

«« 

360 

25 

1. 545.04 

17 

19,000 

•* 

380 

24 

1,538.58 

l8 

20,000 

'* 

400 

23 

1,527.88 

19 

21,000 

*• 

420 

22 

1,513.47 

20 

22,000 

*• 

440 

21 

1,495.78 

21 

23,000 

•* 

460 

20 

1,475-26 

22 

24,000 

14 

480 

19 

1,452-24 

23 

25.000 

44 

500 

18 

1,427.15 

24 

26,000 

4« 

520 

17 

1,400.22 

25 

27.000 

41 

540 

16 

1,371-76 

26 

28,000 

44 

560 

IS 

1,342-04 

27 

29,000 

** 

580 

14 

1,311-32 

23 

30,000 

'* 

600 

13 

1,279.74 

29 

31,000 

** 

620 

12 

1,247-SO 

30 

32,000 

'* 

O40 

II 

1,214.84 

31 

33,000 

*• 

660 

10 

1,181.92 

32 

34.000 

'* 

680 

9 

1. 148-79 

33 

35.000 

*• 

700 

8 

1,115-66 

34 

36.000 

*• 

720 

7 

1,082.59 

35 

37,000 

** 

740 

6 

1,049.69 

36 

38,000 

" 

760 

5 

1,017-03 

37 

39.000 

** 

780 

4 

984.67 

38 

40,000 

** 

800 

3 

952.80 

39 

41,000 

** 

820 

2 

92I.3S 

40 

42,000 

840 

I 

890.40 

Losses $11,333.95 

Less  gains 941-94 

Total  loss $10,392.01 


54         PRINCIPLES   OF  TAXATION 

from  increasing,  it  usually  diminishes  ability  to 
pay.  Instead  of  using  wealth  unproductively,  the 
owner  might,  however,  have  chosen  to  use  it 
productively.  It  had  potential  productive  power. 
It  might  have  created  ability  to  pay.  The  fact 
that  its  owner  chose  not  to  turn  it  into  productive 
channels  does  not  afford  any  basis  for  relieving 
him  at  all  from  taxation  on  account  of  it.  If  the 
community  were  to  attempt  to  regulate  social 
conditions  through  taxation,  it  might  seem  de- 
sirable to  tax  especially  that  wealth  not  used 
productively.  For  all  wealth  used  unproduc- 
tively diminishes  the  productive  power  of  the 
community,  and  beyond  a  fair  average  of  that 
which  it  is  desirable  that  members  of  the  com- 
munity should  use  unproductively,  such  use  con- 
stitutes a  special  private  advantage  on  which  the 
community  might  well  see  fit  to  lay  an  especial 
burden.  Obvious  difficulties  arise  on  contempla- 
tion of  such  a  program.  How  much  of  its  current 
production  of  wealth  should  the  community 
turn  into  unproductive  forms  for  its  pleasure, 
and  how  much  should  it  turn  back  as  capital  into 
productive  channels?  If  the  community  lives  up 
to  its  income,  it  cannot  increase  its  capital  fund, 
but  its  economic  progress  largely  depends  on  an 
increase  of  its  capital  fund.  On  the  other  hand, 
should  the  community  in  any  generation  defer 
entirely  all  enjoyment  of  surplus  income?    To 


EQUALITY  OF  TAXATION  55 

draw  the  line  between  productive  and  unproduc- 
tive expenditure  would  be  a  matter  of  great  diffi- 
culty. Nevertheless,  the  community  might,  if  it 
chose,  undertake  to  regulate  expenditure,  and 
might  use  taxation  for  that  purpose. 

The  community  should  not  generally  seek  through 
taxation  to  gain  indirectly  special  social  ends 
unconnected  with  the  direct  purpose  of  taxation 

Whenever  at  any  point  the  community  goes 
outside  of  the  principle  of  making  a  charge  for  a 
public  service  that  covers  the  cost  of  the  service, 
it  must  consider  other  than  fiscal  effects  of  taxa- 
tion. That  alone  is  a  purely  fiscal  policy  which 
considers  the  cost  of  the  public  service  as  the  only 
correlative  of  the  tax.  As  we  have  seen,  we  have  a 
real  tax  rather  than  a  price  or  special  assessment 
largely  because  such  an  exact  correlation  is 
impossible  or  inexpedient.  Some  people  evi- 
dently consider  that  a  tax  based  on  the  idea  of 
"plucking  the  most  feathers  with  the  least 
squawking"  is  based  entirely  on  fiscal  considera- 
tions. To  cause  the  least  squawking  as  a  correla- 
tive to  the  public  income  is  just  as  remote  from  a 
purely  fiscal  consideration  as  any  matter  of  social 
reform  would  be. 

Irrespective  of  the  difficulties  of  apportioning 
to  the  beneficiary  and  collecting  from  him  the 
cost  of  public  service,  whenever  the  community 


56         PRINCIPLES   OF  TAXATION 

decides  to  render  a  public  service  on  the  express 
basis  of  not  charging  the  cost  to  the  beneficiary, 
— as  in  the  case  of  the  pubHc  schools, — other  than 
purely  fiscal  considerations  must  enter .  Apportion- 
ing this  burden  on  the  basis  of  ability  to  bear  it 
rests  on  a  moral  and  not  really  on  a  fiscal  reason. 
It  seems  undesirable  to  bring  non-fiscal  con- 
siderations by  way  of  social  results,  other  than 
ability  to  pay,  much  into  taxation  questions.  To 
bring  them  in  confuses  both  issues,  the  raising 
of  revenue  by  taxation  and  the  social  end  desired, 
other  than  that  for  which  the  revenue  is  expressly 
raised.  Raising  revenue  by  taxation  according  to 
ability  to  pay  for  expenditure  on  schools  does  not 
produce  any  confusion  between  the  raising  of 
revenue  and  the  social  end  sought  in  the  public 
schools.  Permitting  lotteries,  for  example,  but 
placing  a  heavy  tax  on  them,  partly  for  the  rev- 
enue and  partly  to  discourage  gambling,  confuses 
both  the  fiscal  ideas  connected  with  taxation  and 
the  social  or  moral  ideas  connected  with  gam- 
bling. It  is  hard  enough  to  think  clearly  in  eco- 
nomic, moral,  and  social  matters  under  the  best 
conditions  for  clear  thinking.  Creating  and  main- 
taining conditions  for  clear  thinking  are  in  them- 
selves highly  important  considerations  in  any 
problem.  They  may  be  likened  somewhat  to  the 
keeping  of  correct  books  of  account  in  a  private 
business  enterprise. 


EQUALITY  OF  TAXATION  57 

This  makes  one  important  argument  against 
such  proposals  as  the  single  tax,  which  has  as 
its  basis  the  idea  of  preventing  the  speculative 
holding  of  land.  Since  this  proposal  has  active 
support  we  shall  discuss  it  at  greater  length 
elsewhere.  A  sumptuary  tax,  or  a  real  tax  on 
consumption,  designed  to  discourage  the  non- 
productive use  of  wealth,  would  be  open  to  the 
objection  of  confusing  social  and  fiscal  considera- 
tions. Any  tax  proposal  which  involves  a  double 
purpose  must  meet  this  grave  objection.  If  the 
tax  is  correctly  laid  to  provide  a  revenue  neither 
less  nor  greater  than  the  expenditure  required 
for  the  public  activities  determined  on,  then  it 
accomplishes  too  little  or  too  much  for  its  social 
purpose.  Conversely,  if  laid  to  accomplish  its 
social  purpose,  the  tax  raises  too  little  or  too 
much  revenue.  This  objection  applies  with  much 
greater  force  to  a  whole  scheme  of  taxation  for 
a  social  end  —  like  a  single  tax  on  land  or  on 
uneconomic  consumption  —  than  to  a  tax  which 
is  only  a  minor  part  of  a  general  scheme,  like  a 
high  license  on  the  sale  of  intoxicating  liquors. 

A  tariff  for  revenue  on  imports  taxes  consump- 
tion, and  in  so  far  as  it  taxes  luxuries  at  a  higher 
rate  than  necessities,  it  is  a  tax  on  uneconomic  or 
unproductive  consumption.  The  idea  of  unpro- 
ductive consumption  affords  a  better  basis  for 
the  higher  tax  on  luxuries  than  the  idea  that  the 


58         PRINCIPLES  OF  TAXATION 

consumption  of  luxuries  gives  an  index  of  ability 
to  pay.  As  already  seen,  unproductive  consump- 
tion decreases  ability  to  pay.  Assuming  that 
labor  will  in  the  long  run  shift  the  incidence  of  a 
tax  on  necessities  from  a  tax  on  consumption  to 
a  tax  on  production  in  the  form  of  higher  wages, 
the  consumption  of  necessities  comes  nearer 
being  an  index  of  ability  to  pay  than  a  tax  on 
luxuries. 


CHAPTER  IV 

WHERE    SHOULD   TAXES   BE   PAID? 

The  problem  of  the  resident  of  one  community  who 
owns  wealth  located  in  another  community 

So  far  our  discussion  has  gone  on  the  simple 
assumption  of  a  single  community  whose  mem- 
bers owned  all  the  wealth  in  the  community  and 
none  outside  of  it.  Though  untrue  in  fact,  the 
assumption,  I  believe,  has  not  so  affected  the 
argument  as  to  render  any  of  our  conclusions 
unsound.  We  cannot  go  on  further  with  the  dis- 
cussion without  meeting  existing  facts  squarely. 
In  any  such  purely  ideal  community  probably 
many  of  our  taxation  perplexities  would  not  have 
arisen.  If  one  had  existed  and  it  had  made  the 
market  value  of  property  the  basis  of  its  taxa- 
tion, the  distinction  between  tangible  and  intan- 
gible property  would  not  have  led  into  any  such 
difficulties  as  have  arisen.  Such  a  community 
would  not  have  misled  itself  into  an  attempt  to 
tax  all  tangible  property  at  its  full  market  value 
at  a  given  rate  and  also  to  tax  any  intangible 
property  representing  it  at  its  full  market  value 
at  the  same  rate.  The  community  would  either 
have  taxed  all  tangible  property  at  the  same  rate, 


6o        PRINCIPLES   OF  TAXATION 

and  taxed  any  intangible  representative  at  a 
much  lower  rate,  if  at  all,  or  it  would  have  divided 
the  tax  on  a  given  property  between  the  direct 
and  the  representative  ownership,  or  among  the 
various  representative  ownerships. 

The  confusion  between  property  and  wealth  prob- 
ably would  have  cleared  away  except  for  the  non- 
resident owner 

To  be  sure  that  the  situation  is  clear,  let  us 
state  it  more  concretely.  In  the  ideal  single  com- 
munity that  we  have  assumed,  suppose  Smith 
owns  a  $20,000  farm  on  which  Brown  owns  a 
$10,000  mortgage.  Such  a  community  would 
not  long  have  attempted  to  collect  the  same 
taxes  on  these  two  property  items  as  it  collected 
on  an  unencumbered  farm  worth  $30,000.  It 
might  have  taxed  Smith,  the  mortgagor,  on 
$20,000,  and  not  taxed  Brown,  the  mortgagee, 
on  anything  at  all,  or  have  taxed  him  lightly,  on 
principles  already  explained.  In  that  situation 
Brown  would  have  made  his  loan  on  a  "free- 
from-tax"  interest  rate  and,  with  regard  to 
taxation,  Smith  would  have  been  no  worse  off 
than  Robinson  who  owns  his  farm  free  and  clear. 
Or  the  community  might  have  chosen  to  tax 
Brown,  the  mortgagee,  on  his  $10,000  mortgage, 
and  to  tax  Smith,  the  mortgagor,  on  his  equity 
of  the  value  of  $10,000.     Brown  would   have 


WHERE   SHOULD  TAXES   BE   PAID?    6i 

charged  an  interest  rate  based  on  the  fact  that 
he  must  pay  taxes  on  his  mortgage,  and  Smith 
would  be  no  better  and  no  worse  off  than  be- 
fore. 

Suppose  a  corporation  owning  land,  factory, 
machinery,  and  goods  to  the  market  value  of 
$75,000.  Each  of  five  men  owns  $5000  of  bonds 
of  the  corporation,  secured  by  a  mortgage  on 
all  the  property  of  the  corporation,  a  total  of 
$25,000  in  bonds.  Ten  shareholders  own  all  the 
$50,000  of  stock  of  the  corporation,  $5000  each. 
The  situation  between  the  bondholders  and  the 
corporation  is  just  the  same  as  the  situation 
between  any  individual  property  owner  and  his 
mortgagee,  and  may  be  handled  in  the  same  way. 
That  still  leaves  us  to  consider  the  question  of 
taxation  as  between  the  corporation  and  the 
shareholders.  The  community  would  either  tax 
the  shareholders  on  the  value  of  their  shares,  or 
on  $5000  each,  or  it  would  tax  the  corporation. 
If  the  bondholders  were  taxed,  the  tax  to  the 
corporation  would  be  on  $50,000,  or,  if  they  were 
not  taxed,  it  would  be  on  $75,000.  Observe  that 
the  division  of  ownership  between  the  stock- 
holders and  the  bondholders  does  not,  in  itself, 
give  rise  to  any  problem.  The  market  value 
of  the  stock  takes  into  account  the  existence  of 
the  bonds.  If  the  community  should  tax  the 
shares,  it  would  tax  the  bonds  or  else  tax  the 


62         PRINCIPLES   OF  TAXATION 

coiporation  on  the  value    represented  by  the 
be  ids. 

Under  the  actual  conditions  we  do  not  always 
have  the  mortgagor  and  the  mortgagee  living  in 
the  community  in  which  the  tangible  property  is 
located.  We  do  not  always  find  all  the  tangible 
property  of  a  corporation  and  all  its  bondholders 
and  stockholders  in  the  same  community.  As 
the  machinery  by  which  business  is  done  becomes 
more  intricate,  and  social  conditions  generally 
more  complex,  the  residence  of  people  who  own 
or  have  an  interest  in  tangible  property  becomes 
more  and  more  likely  to  be  in  some  place  other 
than  that  in  which  the  property  is  located. 
Where  shall  such  non-resident  owners  pay  their 
taxes? 

Different  treatment  of  the  direct  and  the  indirect 
owners  of  wealth 

Let  us  take  the  simplest  case.  Suppose  Brown, 
who  lives  in  Blackacre,  has  invested  $10,000  in 
buying  a  house  in  Whiteacre,  in  another  State, 
and  rents  it  for  $1000  a  year.  In  actual  practice 
no  difficulty  has  arisen  over  this  situation. 
Brown  pays  taxes  in  Blackacre  on  his  real  estate 
there.  The  community  of  Blackacre  feels  satis- 
fied that  he  should  not  pay  any  taxes  there  on 
account  of  his  investment  in  the  Whiteacre 
house.    Jones,  who  lives  in  Blackacre,  invests 


WHERE   SHOULD   TAXES   BE   PAID?    63 

$10,000  in  a  mortgage  on  a  lot  and  building  in 
Whiteacre.  In  this  situation  the  community  of 
Blackacre  does  not  feel  satisfied  unless  Jones 
pays  a  tax  in  Blackacre  on  account  of  his  invest- 
ment in  the  Whiteacre  property.  Both  Brown 
and  Jones  have  $io,ooo  invested  in  Whiteacre 
real  estate.  Do  the  legal  arrangements  surround- 
ing the  two  transactions,  the  agreements  between 
parties,  the  amount  of  risk  that  each  accepts  with 
his  investment,  have  anything  to  do  with  the 
question  of  taxation?  Our  earlier  argument  went 
to  show  that  each  should  be  treated  alike  in  the 
matter  of  taxation  and  also  what  constituted 
equal  treatment.  No  economic  reason  presents 
itself  for  treating  them  differently  when  they 
reside  in  one  community  and  the  real  estate  in 
which  they  have  invested  lies  in  another. 

To  make  the  situation  still  more  concrete, 
suppose  Brown  and  Jones  live  in  Boston  and  the 
real  estate  in  each  case  is  a  farm  in  Oregon.  The 
jurisdiction  making  the  tax  laws  for  Boston,  the 
Commonwealth  of  Massachusetts,  realizes  that  if 
Boston  taxes  Brown  say  i  .5  per  cent  on  his  invest- 
ment in  addition  to  a  similar  amount  the  Oregon 
community  taxes  him,  he  will  be  paying  the  total 
very  heavy  tax  of  say  3  per  cent.  It  considers 
that  unfair  to  its  citizen  Brown.  But  why  should 
Massachusetts  discriminate  between  this  kind  of 
an  investor  beyond  its  borders,  who  accepts  the 


64         PRINCIPLES   OF  TAXATION 

risks  of  complete  ownership  for  the  sake  of  an 
anticipated  greater  return,  and  an  investor  who, 
refusing  to  accept  so  great  a  risk,  insists  on  the 
protection  of  an  equity? 

Is  there  any  difTerence  in  the  possibiHty  of 
shifting  the  incidence  of  taxation  in  these  cases 
that  should  make  a  difTerence  in  treatment? 
Brown  cannot  charge  any  more  for  the  produce 
of  his  farm,  to  make  up  for  the  extra  tax  of  1.5 
per  cent  he  pays  in  Boston,  than  is  charged  by  a 
man  who  lives  on  his  own  farm  in  Oregon.  We 
have  said,  however,  that  if  a  community  taxes 
a  creditor  on  his  credits,  he  will  shift  the  tax  to 
his  debtor  in  the  form  of  a  higher  interest  rate. 
That  is  true;  and  the  fact  that  most  taxing 
jurisdictions  tax  mortgages,  at  least  "foreign" 
mortgages  of  this  kind,  means  that  the  Oregon 
borrower  pays  an  interest  rate  higher  by  the 
average  of  this  taxation  than  he  would  if  these 
jurisdictions  did  not  tax  such  mortgages.  As 
already  seen,  the  Oregon  borrower  cannot  shift 
the  burden  of  the  tax  by  charging  higher  prices 
than  the  Oregon  farmer  who  owns  his  farm  clear 
and  free.  So  the  taxation  of  "  foreign  "  mortgages 
in  Massachusetts  and  other  taxing  jurisdictions 
works  to  the  disadvantage  of  the  Oregon  bor- 
rower. But  why,  the  legislator  asks,  should 
Massachusetts  be  concerned  about  that? 


WHERE   SHOULD   TAXES   BE   PAID?     65 

Taxation  piracy 

It  is  true  that  many  people  consider  each  of 
our  States  a  poHtical  ship  chartered  to  sail  not 
under  the  best,  but  under  the  worst,  ethics  of  the 
market-place  and  to  commit  piracy  by  means  of 
the  law.  Just  as  a  man  acting  in  a  representative 
capacity  as,  say,  a  corporation  director,  will  do 
unprincipled  things  for  the  advantage  of  his 
principal  that  he  would  be  ashamed  to  do  on  his 
own  account,  so  a  legislator,  with  a  personal 
responsibility  much  more  diluted  than  that  of  a 
corporate  director,  will  vote  on  behalf  of  the 
community  for  measures  so  bad  ethically  that  he 
would  reject  them  if  they  were  personal  matters. 
Stockholders  and  citizens  approve  of  things  done 
by  others  on  their  behalf  that  they  would  be 
ashamed  to  do  on  their  own  account.  While  the 
director  and  the  legislator  free  their  consciences 
for  doing  the  deed  with  the  thought  that  they 
take  no  advantage  from  it,  at  the  same  time  the 
stockholder  and  the  citizen  free  their  consciences 
for  accepting  the  advantage  with  the  thought 
that  they  are  not  responsible  for  the  deed.  Seem- 
ingly the  ethical  concept  of  representative  acts 
tends  to  grow  better  and  to  leave  our  evils  in 
these  representative  matters  those  of  ignorance 
rather  than  those  of  bad  intent.  Taxation  has 
appeared,  however,  to  offer  a  chance  to  take 


66         PRINCIPLES  OF  TAXATION 

plunder  from  other  States  on  letters  of  marque 
and  reprisal.  But  does  a  State  really  profit  so 
much? 

Lending  and  borrowing  communities 

What  would  happen  if  one  State  now  taxing 
foreign  mortgages  should  give  up  taxing  them, 
but  all  other  States  now  taxing  them,  should 
continue  this  taxation?  It  would  have  an  effect 
on  the  interest  rate  of  the  Oregon  borrower  be- 
cause, under  financial,  as  well  as  under  physical, 
law,  no  force  operates  without  a  result;  but  the 
effect  may  be  as  difficult  to  measure  as  the  pull  a 
base-ball  in  the  air  has  on  the  earth.  For  a  State 
to  do  away  with  the  taxation  of  foreign  mortgages 
would  remove  the  burden  of  that  State's  taxa- 
tion not  only  from  the  Oregon  borrower,  but  from 
all  other  foreign  mortgage  borrowers,  all  of  whom 
are  bidders  for  capital.  The  capital  supply  of 
these  foreign  borrowers  comes  not  from  one 
State  alone,  but  from  all  lending  States.  The 
surplus  funds  of  one  State  available  for  foreign 
mortgages  is  not  sufficient  for  the  foreign  bor- 
rowers, so  they  must  bid  enough  to  overcome  the 
taxation  handicap  on  their  borrowing  in  the  other 
States. 

For  the  purpose  of  clarifying  the  argument  by 
being  concrete,  let  us  assume  that  if  Massa- 
chusetts should  give  up  taxing  foreign  mortgages 


WHERE   SHOULD  TAXES   BE   PAID?    67 

at  a  tax  rate  which  averages  (if  paid)  say  i  .5  per 
cent,  the  interest  rate  to  foreign  borrowers  would 
drop  .10  per  cent.  That  is,  if  foreign  mortgagees 
now  average  to  pay  6  per  cent,  they  would  then 
average  to  be  paying  5.90  per  cent.  Of  course,  it 
is  impossible  to  say  what  the  result  would  be  in 
advance  of  the  fact,  and  very  likely  it  would  be 
impossible  to  say  what  the  result  was  after  the 
fact.  Many  variables  of  the  financial  market 
change  so  rapidly  that  at  any  given  time  the 
result  of  a  change  of  this  kind  might  not  be  trace- 
able. These  figures  do  not  represent  even  mere 
conjectures,  but  simply  serve  as  symbols  in  the 
argument.  Assume  that  this  change  has  taken 
place.  What  has  happened?  When  the  lender 
paid  a  tax,  he  received  |6o  in  interest  on  each 
$1000  invested,  paid  the  State  $15  in  taxes,  and 
had  a  net  return  of  $45.  Now  that  the  State  does 
not  exact  any  tax,  the  lender  receives  and  keeps 
as  net  $59  in  interest  on  each  $1000  invested. 
The  citizen  has  gained  most  of  what  the  State 
has  lost.  His  gain  reduces  the  real  net  loss  to  the 
community  to  $l  out  of  $60. 

Massachusetts  giving  up  its  tax  would  impose 
a  like  net  loss  on  all  other  lending  communities 
and  give  a  corresponding  benefit  to  all  other  bor- 
rowing communities.  If  all  lending  communities 
should  give  up  their  tax,  which,  let  us  assume, 
averages  i  .5  per  cent,  if  would  not  follow  that  the 


68         PRINCIPLES  OF  TAXATION 

interest  rate  to  the  borrowing  community  would 
drop  from  6  per  cent  to  4.5  per  cent.  Since  the 
taxing  communities  have  no  method  of  assessing 
these  foreign  mortgages,  other  than  the  declara- 
tion of  the  owner,  presumably  many  such  mort- 
gages escape  taxation.  Every  credit  that  does  not 
pay  a  tax  tends  to  limit  the  effect  of  taxation  on 
the  interest  rate.  As  the  interest  rate  fell  off,  the 
demand  for  money  would  increase  and  prevent 
the  full  decline  in  the  interest  rate.  Therefore,  if 
the  taxation  averages  1.5  per  cent  and  should 
all  be  taken  off,  the  decline  in  the  interest  rate 
might  be  from  6  per  cent  to  5.5  per  cent. 

Our  earlier  discussion  of  the  taxation  of  credits 
and  other  intangibles  assumed  uniform  tax  laws 
operating  over  the  whole  nation  and  the  nation 
as  one  community  in  interest.  It  assumed  even 
something  more  of  an  ideal  and  less  of  a  reality 
than  this  in  assuming  the  nation  as  the  only  com- 
munity. The  nation  as  a  community,  however, 
is  so  large  that  it  has  debtor  and  creditor  sections, 
and  the  division  of  the  nation  into  States,  each  a 
jurisdiction  establishing  tax  laws,  leads  to  one 
section  endeavoring  to  gain  an  advantage  over 
the  other.  To  some  extent  the  endeavor  can  be 
successful.  What  would  be  the  effect  of  the 
debtor  community  taxing  the  mortgage?  That 
would  very  simply  and  directly,  in  the  manner 
shown  in  the  earlier  discussion  of  taxing  credits, 


WHERE   SHOULD   TAXES   BE   PAID?    69 

result  in  an  increase  of  the  interest  rate  to  the 
borrower  to  cover  the  tax  on  the  lender. 

Where  taxes  should  be  paid  as  tested  by  those  taxes 
due  on  account  of  service  received 

This  leads  directly  to  the  question  of  where 
taxes  should  be  paid.  We  have  taken  as  the  basis 
of  taxation  two  principles,  the  cost  of  perform- 
ing THE  PUBLIC  SERVICE  TO  PAY  FOR  WHICH  THE 
TAX  IS  LEVIED,  AND  ABILITY  TO  BEAR  THE  PUBLIC 

BURDEN.  Do  they  help  in  considering  where 
taxes  should  be  paid  as  they  have  in  considering 
071  what  taxes  should  be  paid? 

If  a  man  owns  real  estate  and  lives  in  the  com- 
munity in  which  the  real  estate  lies,  no  question 
arises.  Since  his  property  and  residence  are  in 
the  same  place,  he  receives  all  his  public  benefits 
there  and  owes  all  his  public  obligations  there. 
Our  question  does  not  arise  till  we  have  property 
(we  are  speaking  now  of  tangible  property)  in  one 
community  and  the  owner  residing  in  another. 
Suppose  the  property  is  real  estate:  that  Jones 
owns  a  house  in  Hartford  and  lives  in  Worcester. 
As  a  matter  of  fact  he  pays  in  Hartford  all  his 
taxes  on  account  of  that  property.  The  com- 
munity in  Worcester  rests  perfectly  content  at 
this  situation.  Brown,  who  lives  in  Worcester, 
has  an  investment  in  a  mortgage  in  Hartford. 
The  people  of  Worcester  are  not  satisfied  to  let 


70         PRINCIPLES   OF  TAXATION 

Brown  go  without  paying  any  taxes  in  the  city  of 
his  residence.  Is  there  a  substantial  difference 
between  the  situations  of  Brown  and  Jones  to 
justify  this  difference  in  feeling?  Let  us  first 
consider  the  case  of  Jones. 

He  lives  in  Worcester  and  owns  a  house  in 
Hartford.  The  community  of  Hartford  bears  all 
the  expense  of  the  public  activity  for  the  benefit 
of  that  house  —  highways,  fire  and  police  pro- 
tection. Excepting  for  the  practically  negligible 
fact  that  some  action  on  account  of  it,  say  some 
tort  action,  might  be  brought  in  the  Massachu- 
setts courts  as  having  jurisdiction  over  the  person 
of  the  owner,  the  Worcester  community  bears  no 
expense  of  public  activity  because  of  Jones's 
ownership  of  this  Hartford  property. 

Where  taxes  should  he  paid  as  tested  by  those  taxes 
due  on  account  of  ability  to  pay 

How  about  those  public  activities  which  do  not 
bear  any  relation  to  the  private  ownership  of 
wealth?  Schools  have  been  our  typical  example  of 
these.  Let  us  assume  that  Jones  is  childless,  and 
therefore  imposes  no  expense  on  the  public 
activity  of  Worcester  in  the  matter  of  education. 
Largely  because  of  public  activities  of  this  kind, 
as  we  have  seen,  the  counterbalancing  taxation 
principle  of  payment  according  to  ability  arose. 
As  we  have  stated  in  our  discussion  of  that  prin- 


WHERE  SHOULD  TAXES   BE   PAID?    71 

ciple,  it  represents  part  of  a  moral  ideal,  of  an 
altruistic  obligation  of  the  individual,  which  the 
community  impresses  to  the  extent  of  offsetting 
expenditures  which  it  sees  fit  to  make  without 
repayment  from  the  beneficiar3^  Where  does 
Jones  owe  his  obligation  to  pay  taxes  according 
to  his  ability  —  in  the  community  in  which  he 
lives  or  in  the  community  from  which  he  derives 
his  income? 

The  community  in  which  a  man  owning  wealth 
lives,  though  all  the  wealth  lies  in  some  other 
community,  generally  feels  that  he  should  bear 
some  share  of  the  public  burden  of  his  place  of 
residence  and  pay  some  taxes  there.  The  feeling 
seems  reasonable.  If  a  man  chooses  to  live  in  a 
community,  his  fellows  in  that  community  natu- 
rally feel  that  he  should  identify  himself  with  it, 
that  its  interests  should  become  his  interests,  and 
his  ability  become  available  for  its  undertakings. 
A  man  with  wealth  in  one  community,  who 
chooses  to  live  in  another,  would  himself  prefer 
to  contribute  to  the  community  of  his  residence. 
If  he  must  make  a  certain  total  contribution  for 
community  purposes  out  of  his  wealth,  he  would 
prefer  to  make  a  considerable  part  of  it,  at  least, 
to  the  community  in  which  he  dwells. 

On  the  other  hand,  his  ability  to  pay  arises  in 
the  community  in  which  his  wealth  is  located. 
Non-resident  owners  of  wealth  in  that  commun- 


72         PRINCIPLES  OF  TAXATION 

ity  feel  conscious  of  this.  Especially  if  they  are 
employers  of  labor  there  they  feel  a  sense  of 
obligation.  Members  of  the  community  feel  that 
the  non-resident  owner  owes  a  duty  there.  It  is 
impossible  to  say  that  the  claims  of  one  commun- 
ity so  outbalance  those  of  the  other  that  the 
claims  of  the  other  should  not  be  recognized.  I 
feel  that  the  community  in  which  the  wealth  lies 
has  a  much  larger  claim  on  the  owner's  ability 
than  the  community  of  his  residence.  But  in 
whatever  proportion,  it  seems  evident  that  the 
part  of  the  tax  he  pays  on  account  of  his  ability, 
as  opposed  to  that  part  he  pays  as  his  share  of  the 
cost  of  public  activities  for  the  benefit  of  his 
wealth,  might  properly  be  divided  between  the 
two  communities. 

Jones,  who  lives  in  Worcester  and  has  invested 
in  a  house  in  Hartford,  which  he  rents,  does  not, 
as  we  have  seen,  pay  any  taxes  in  Worcester. 
The  community  of  his  residence  acquiesces, 
under  these  circumstances,  in  the  payment  of  all 
his  taxes  in  the  community  in  which  his  wealth 
lies.  Now,  let  us  take  up  the  case  of  Brown,  who 
lives  in  Worcester  and  has  invested  in  a  mort- 
gage in  Hartford.  In  this  case  Worcester  takes 
the  position  that  Brown  owes  all  his  tax  obliga- 
tion to  the  community  of  Worcester,  treats  him 
as  if  his  investment  represented  so  much  wealth 
in  Worcester.   We  have  seen,  however,  that  the 


WHERE  SHOULD  TAXES   BE   PAID?    73 

public  activities  in  Worcester  do  nothing  for  the 
benefit  of  the  wealth,  the  property  in  Hartford, 
which  is  the  real  substance  of  Brown's  capital. 
Yet  Worcester  insists  on  taxing  Brown  on  the 
same  basis  as  it  would  tax  him  if  he  had  invested 
in  a  house  in  Worcester  and  received  his  return  on 
his  capital  directly  from  the  rental  of  that  house, 
instead  of  receiving  his  return  on  his  capital  indi- 
rectly, as  he  does  in  the  form  of  interest  from  the 
rent  of  the  Hartford  house.  Worcester  seeks  to 
exact  not  only  all  that  he  should  pay  on  the  basis 
of  his  ability  to  pay,  but  also  an  amount  equiva- 
lent to  the  cost  of  all  those  public  activities  by 
which  Hartford  benefits  the  mortgaged  property 
—  highways,  fire  and  police  protection. 

Only  one  real  economic  difference  distinguishes 
Brown  from  Jones.  Brown  prefers  to  avoid  risk 
so  far  as  possible  and  makes  the  necessary  sacri- 
fice of  income  for  the  sake  of  avoiding  risk.  Rob- 
inson, let  us  say,  owns  the  house  in  Hartford  on 
which  Brown  holds  a  mortgage.  The  house  is 
wealth  representing  the  joint  capital  of  Robinson 
and  Brown.  They  have  stipulated  as  between 
themselves  that  Robinson  will  assume  the  greater 
risk  on  the  chance  of  getting  the  greater  income. 
This  agreement  affects  their  legal  relationship  to 
each  other  and  to  various  other  people.  Many  of 
their  relationships  are  different  from  what  they 
would  be  if  they  were  joint  owners;  so  far  as  the 


74         PRINCIPLES  OF  TAXATION 

economic  situation  on  which  taxation  should  be 
based  is  concerned  they  are  in  the  position  of 
joint  owners.  It  is  immaterial  that  in  the  legal 
situation  Robinson  may,  by  the  machinery 
through  which  the  law  works,  or  by  private  stip- 
ulation with  Brown,  actually  appear  as  if  paying 
the  whole  tax.  As  we  have  seen,  that  is  immaterial 
so  far  as  Hartford  is  concerned.  If  Robinson  pays 
it,  he  deducts  so  much  from  the  gross  income  of 
Brown  on  account  of  the  property.^ 

1  Jurisdictions  not  taxing  mortgages  at  all  —  whether 
the  real  estate  mortgage  is  in  or  out  of  the  State:  California, 
Delaware,  Idaho,  Utah,  Washington. 

Alabama  has  a  mortgage  recording  tax  for  mortgages  on 
realty  in  the  State,  but  taxes  mortgages  on  realty  outside  of 
the  State. 

Connecticut  does  not  tax  mortgages  on  realty  in  the 
State.  Mortgages  on  realty  outside  the  State  may  be  re- 
corded with  the  State  Treasurer  and  a  tax  paid  at  the  rate 
of  4  mills  per  annum.  Otherwise  they  are  taxable  at  the 
full  general  property  rate. 

Iowa  taxes  at  5  mills  per  annum,  whether  the  property 
mortgaged  is  in  or  out  of  the  State. 

Minnesota  has  a  mortgage  recording  tax  for  mortgages 
on  realty  in  the  State  amounting  to  three  tenths  of  a  mill 
per  annum  and  taxes  mortgages  on  realty  outside  the  State 
at  3  mills  per  annum. 

Maryland  taxes  at  the  rate  of  something  over  3  mills 
per  annum  whether  the  mortgage  is  on  realty  in  or  out  of 
the  State. 

Michigan  has  a  mortgage  recording  tax  of  5  mills  on 
mortgages  on  realty  in  the  State.  The  owner  of  a  mortgage 
on  realty  outside  of  the  State  may  register  it  as  free  from 
further  taxation  on  the  payment  of  a  5-mill  tax. 

New  York  has  a  mortgage  recording  tax  of  .5  per  cent 


WHERE  SHOULD  T.\XES   BE   PAID?     75 

Our  discussion  has  shown  that  a  taxation  of 
such  representatives  of  property  as  mortgages, 

for  the  life  of  the  mortgage  on  realty  in  the  State;  mort- 
gages on  realty  outside  the  State  may  be  stamped  under  the 
secured  debts  tax  law  free  from  further  taxes  on  the  pay- 
ment of  .5  per  cent  for  the  life  of  the  mortgage. 

Pennsylvania  and  Rhode  Island  tax  mortgages  4  mills  per 
annum  whether  the  property  is  in  or  out  of  the  State. 

Wisconsin  has  an  income  tax  reaching  income  from  mort- 
gages whether  on  realty  in  or  out  of  the  State. 

Assuming  that  1.5  per  cent  represents  an  average  rate  of 
taxation,  it  appears  that  these  special  rates  tax  mortgages 
from  one  fifth  to  one  third  of  the  rate  on  tangible  property. 
Since  taxable  property  is  seldom  assessed  at  its  full  value, 
and  these  mortgages  are,  in  the  nature  of  the  case,  assessed 
at  100  cents  on  the  dollar  invested,  the  proportional  taxa- 
tion of  the  mortgages  is  even  higher.  Considering  the  fact 
that  this  form  of  property  imposes  only  a  slight  cost  on  the 
Government,  and  a  tax  on  it  in  excess  of  that  cost  is  essen- 
tially not  a  tax  on  ability,  but  as  it  works  out  is  rather  a  tax 
on  a  form  of  doing  business,  even  these  reduced  rates  of 
taxation  seem  rather  high.  On  a  mortgage  running  for  three 
years  the  New  York  rate  amounts  to  1.66  mills  and  on  a 
mortgage  running  five  years  to  i  mill  per  annum.  This 
actually  works  out  to  something  lower  from  the  practice  of 
"extending"  the  mortgage,  i.e.,  renewing  the  debt  without 
changing  the  mortgage  securing  it,  so  that  the  mortgage 
may  run  for  several  terms  without  a  new  recording. 

The  rate  under  this  New  York  tax  seems  approximately 
a  fair  rate  under  present  circumstances. 

Jurisdictions  not  taxing  mortgages  on  realty  in  the  State, 
but   taxing  mortgages  on  realty  outside  the  State  are:  — 

Colorado,  Louisiana,  Maine,  Massachusetts,  Nebraska, 
New  Hampshire  (provided  the  rate  of  interest  on  a  mort- 
gage in  the  State  does  not  exceed  5  per  cent).  New  Jersey, 
Wyoming. 

Jurisdictions  taxing  all  mortgages,  whether  the  realty 
mortgaged  is  within  or  outside  the  State  are:  — 


76         PRINCIPLES   OF  TAXATION 

bonds,  and  stocks  in  itself  amounts  to  a  taxation 
of  a  form  of  doing  business.  The  growth  of  this 
class  of  property,  and  the  amount  of  non-resident 
ownership  increasing  coincidently  with  it,  and 
partly  because  of  it,  especially  in  its  newer  forms 
of  the  corporation  security,  developed  a  feeling  in 
the  community  that  a  resident,  of  obvious  ability 
to  pay  on  account  of  his  ownership  of  non-local 
wealth,  ought  to  pay  taxes  in  the  community  of 
his  residence.  Non-resident  direct  owners  con- 
stitute a  small  class  compared  with  these  non- 
resident investors  through  the  forms  of  indirect 
ownership  furnished  by  such  instruments  as  the 
mortgage  and  the  corporation  security.  It  seems 
fair  as  a  premise  that  a  resident  in  a  community, 
able  to  pay  taxes,  should  pay  them.  It  is  not  so 
easy  to  see  that  the  real  wealth  which  actually 
constitutes  his  ability  pays  taxes  somewhere  else. 
Even  when  it  is  seen,  the  foreign  payment  of 
taxes  seems  so  entirely  unsatisfactory  from  the 
local  viewpoint  that  the  community  of  residence 

Arizona,  Arkansas,  Florida,  Georgia,  Illinois,  Indiana, 
Kansas,  Kentucky,  Mississippi,  Missouri  (if  the  mortgage 
is  on  realty  outside  the  State,  taxation  depends  on  whether 
the  tangible  thing,  the  note,  evidencing  the  mortgage  ever 
was  in  the  State),  Montana,  Nevada,  New  Mexico,  North 
Carolina,  North  Dakota,  Ohio,  Oklahoma  (except  that 
mortgages  held  by  a  building  and  loan  association  in  the 
State,  when  given  by  a  resident  on  realty  in  that  State, 
are  exempt),  Oregon,  South  Carolina,  South  Dakota, 
Tennessee,  Texas,  Vermont,  Virginia,  West  Virginia. 


WHERE  SHOULD  TAXES   BE   PAID?    77 

insists  that  the  resident  pay  taxes  anyway,  irre- 
spective of  what  happens  anywhere  else.  The 
community  of  residence  sees  the  unfairness  most 
clearly  in  the  case  of  the  direct  ownership  of  non- 
local property,  —  the  situation  of  the  man  in 
Worcester  owning  a  house  in  Hartford.  Except 
in  the  rare  instance  of  an  income  tax  which  is 
enforced,  the  community  makes  no  attempt  to 
tax  a  resident  because  of  his  ability  on  account  of 
his  direct  ownership  of  non-local  property.  So  far 
as  the  feeling  that  a  resident  who  is  rich  on  ac- 
count of  his  ownership  of  non-local  wealth  should 
not  escape  from  a  share  of  the  community  burden 
results  in  a  demand  for  taxing  him,  that  demand 
should  extend  to  a  resident  who  directly  owns 
wealth  located  outside  of  his  place  of  residence  as 
well  as  to  the  resident  who  owns  it  through  the 
intervention  of  an  intangible. 

The  inability  of  most  citizens  untrained  in  eco- 
nomics to  understand  that  a  credit,  though  prop- 
erty, is  not  wealth,  creates  a  great  difficulty  in  the 
way  of  fair  taxation  in  itself  and  largely  adds  to 
the  perplexing  situation  created  by  the  non- 
resident owner.  The  positions  of  the  various 
jurisdictions  in  taxation  matters  indicate  clearly 
the  obstacles  to  correct  thinking  as  well  as  other 
difficulties  in  the  way  of  fair  results.  Those  juris- 
dictions which  tax  all  mortgages,  both  those  on 
realty  within  the  State  as  well  as  those  on  realty 


78         PRINCIPLES  OF  TAXATION 

outside  the  State,  show  a  failure  to  appreciate  the 
distinction  between  the  legal  property  of  a  credit 
and  the  actual  existence  of  economic  wealth. 
Jurisdictions  which  tax  mortgages  on  property 
outside  the  State,  but  do  not  tax  mortgages  on 
property  within  the  State,  do  appreciate  the  dis- 
tinction between  legal  property  and  economic 
wealth,  but  want  to  reach  the  ability  of  the  resi- 
dent who  has  invested  outside  the  jurisdiction. 

There  is  as  real  a  conflict  of  interest  among  the 
communities  within  a  State  as  among  the  state 
communities 

As  a  matter  of  fact,  those  jurisdictions  which 
tax  all  mortgages,  those  on  realty  within  the 
State  as  well  as  those  on  realty  outside  the  State, 
have  a  practice  nearly  as  easy  to  defend  on  prin- 
ciple, except  the  principle  of  piracy  on  other 
States,  as  the  practice  of  those  jurisdictions 
which  tax  mortgages  on  realty  outside  the  State, 
but  not  those  on  realty  within  the  State.  The 
community  of  Worcester  fails  just  as  much  to 
get  at  the  "ability"  of  a  resident  who  invests  in 
mortgages  in  Springfield,  Massachusetts,  as  it 
would  if  it  could  not  tax  the  resident  who  invests 
in  mortgages  in  Hartford,  Connecticut. 

In  Worcester,  wealth  in  Springfield  in  the 
same  State  is  just  as  much  non-local  as  wealth  in 
Hartford  in  another  State.  So  taxing  residents  on 


WHERE  SHOULD  TAXES   BE   PAID?    79 

their   mortgages   on  property  in   other   States 
reaches  only  part  of  the  problem. 

Sometimes  a  jurisdiction  appreciates  the  dis- 
tinction between  a  legal  property  right  and  real 
economic  wealth  in  its  application  to  the  stock  of 
a  corporation  when  it  does  not  show  an  apprecia- 
tion of  the  distinction  in  its  application  to  a  credit 
in  the  form  of  a  mortgage  or  a  corporation  bond. 
Since  the  shifting  of  the  incidence  of  the  tax  to 
the  borrower  helps  obscure  the  situation  in  the 
case  of  a  credit,  the  distinction  is  clearer  in  the 
case  of  a  stock.  It  is  fairly  easy  to  follow  through 
the  process  whereby  the  payment  of  a  tax  by  a 
corporation  comes  out  of  the  pocket  of  the  share- 
holder.* 

1  To  illustrate  the  variations  of  method  in  taxing  stock, 
the  taxation  of  the  stock  of  manufacturing  corporations  is 
given  in  this  note.  Since  financial  corporations,  as  banks 
and  insurance  companies,  and  to  some  extent  public  seri'ice 
corporations  are  treated  differently  by  the  States  in  taxation 
from  the  stock  of  manufacturing  corporations,  it  is  not 
possible  to  make  a  general  statement  about  the  taxation  of 
stock  that  would  apply  to  the  stock  of  all  kinds  of  corpora- 
tions. 

All  stock  is  taxable,  whether  the  corporation  is  incorpor- 
ated in  the  jurisdiction  or  not,  in  Oregon  and  Wyoming. 

Stock  is  taxable,  if  the  corporation  is  incorporated  out- 
side the  jurisdiction,  in  Colorado,  Florida,  Georgia,  Illinois, 
Indiana,  Louisiana,  Massachusetts,  Michigan,  Mississippi, 
North  Carolina,  North  Dakota,  Texas,  and  Virginia. 

In  Iowa,  stock  in  a  manufacturing  corporation  incorpor- 
ated outside  the  jurisdiction  is  exempt  if  tangible  property 
of  the  corporation  is  located  in  the  State;  otherwise  the 


80         PRINCIPLES  OF  TAXATION 

Some  jurisdictions  tax  the  stock  of  corpora- 
tions incorporated  outside  the  jurisdiction,  but 

stock  is  taxed  at  the  special  rate  of  5  mills  on  the  dollar  of 
.assessed  valuation. 

In  Maryland,  it  is  taxed  at  the  rate  of  3  mills  for  the  local 
tax  and  i  .5  mills  for  the  State  tax,  or  a  total  tax  of  4.5  mills. 
Stock  of  corporations  incorporated  in  Maryland  is  taxed, 
but  the  corporation  pays  the  tax. 

Stock  of  manufacturing  corporations  incorporated  in  the 
jurisdiction  is  not  taxed  in:  Arkansas,  Colorado,  Connecti- 
cut, Delaware,  District  of  Columbia,  Florida,  Georgia, 
Illinois,  Kansas,  Kentucky,  Louisiana,  Massachusetts, 
Michigan,  Mississippi,  Missouri,  New  Hampshire,  New 
Jersey,  New  York,  North  Carolina,  North  Dakota,  Ohio, 
Oklahoma,  Tennessee,  Texas,  Virginia,  Washington,  and 
Wisconsin. 

Stock  of  manufacturing  corporations  incorporated  in  the 
jurisdiction  is  not  taxed  if  the  corporation  has  its  tangible 
property  in  the  States  listed  below.  Whether  or  not  all  the 
property  must  be  in  the  State  has  not  in  every  case  been  de- 
cided: Arizona,  California,  Idaho,  Indiana,  Maine,  Minne- 
sota, Montana,  Nebraska,  Nevada,  New  Mexico,  Rhode 
Island,  South  Carolina,  South  Dakota,  Utah,  and  West 
Virginia. 

Pennsylvania  taxes  the  stock  of  manufacturing  corpora- 
tions incorporated  in  or  out  of  the  jurisdiction,  in  propor- 
tion to  the  amount  of  property  of  the  corporation  located 
in  the  State,  at  the  rate  of  5  mills.  The  corporation  pays  the 
tax.  Stock  of  a  corporation  incorporated  in  another  State, 
and  not  having  any  property  in  Pennsylvania,  is  taxed  to 
the  holder  at  the  rate  of  4  mills. 

Stock  of  corporations  incorporated  outside  the  jurisdic- 
tion is  not  taxed  if  its  tangible  property  is  located  in  the 
State  (whether  all  its  property  must  be  in  the  State  has 
not  in  every  case  been  decided)  in:  Arizona,  Arkansas, 
California,  Idaho,  Kansas,  Kentucky,  Maine,  Minnesota, 
Montana,  Nebraska,  Nevada,  New  Mexico,  Oklahoma, 


WHERE  SHOULD  TAXES   BE   PAID?    8i 

do  not  tax  the  stock  of  those  incorporated  in  the 
jurisdiction.  They  do  not  make  any  distinction 
in  the  tax  on  the  ground  of  the  location  of  the 
property.  A  distinction  on  the  ground  of  the 
place  of  incorporation  has  no  basis  except  to 
favor  incorporation  in  the  State.  That  is  not  a 
proper  purpose  of  taxation.  So  far  as  a  State 
wants  to  control  those  corporations  doing  busi- 
ness within  its  borders,  it  has  ample  powers 
irrespective  of  whether  they  are  incorporated  in 
or  out  of  the  State. 

Those  jurisdictions  which  disregard  the  place 
of  incorporation  and  tax  the  stock  of  corporations 
which  have  their  tangible  property  outside  the 
State,  but  do  not  tax  the  stock  of  corporations 
which  have  their  tangible  property  in  the  State, 
show  the  endeavor  to  reach  the  resident  owner  of 
wealth  in  another  jurisdiction.  The  same  criti- 
cism applies  as  to  the  taxation  of  mortgages  on 
realty  in  another  State  and  the  exemption  of 
those  on  realty  within  the  State.  If  the  stock- 
holder lives  in  Worcester,  and  the  corporation  has 
all  its  tangible  property  in  Springfield,  Worces- 
ter has  just  as  much  reason  for  taxing  him  as 
if  the  tangible  property  were  in  Hartford.    A 

Rhode  Island,  South  Carolina,  South  Dakota,  Tennessee, 
Utah,  and  West  Virginia. 

In  Ohio,  if  two  thirds  of  the  property  of  the  corporatiou 
is  taxed  in  the  State,  the  stock  is  not  taxed. 


82         PRINCIPLES  OF  TAXATION 

corporation  may  have  its  property  in  more  than 
one  jurisdiction.  An  individual  is  taxed  on  each 
piece  of  property.  The  stock  of  a  corporation 
represents  all  its  property.  If  only  part  of  the 
corporation's  property  lies  in  the  taxing  jurisdic- 
tion, shall  its  stock  be  freed  from  taxation? 
Jurisdictions  answer  this  question  differently. 

One  would  assume  that  the  taxation  of  bonds, 
certainly  of  mortgage  bonds,  would  follow  the 
rule  of  taxation  of  the  ordinary  mortgage  given 
by  an  individual.  The  corporation  mortgages  its 
property  just  as  an  individual  does.  Joint  owner- 
ship by  bondholders  of  the  corporation  mortgage 
does  not  affect  the  large  principles  involved. 
The  corporate  form,  however,  has  confused  the 
issue,  and  some  jurisdictions  treat  a  bond  and  an 
individual  mortgage  differently. * 

'  California,  Colorado,  Massachusetts,  New  Jersey,  and 
Wyoming  exempt  from  taxation  bonds  secured  on  real  es- 
tate in  the  jurisdiction. 

The  following  jurisdictions  tax  them,  although  they  do 
not  tax  individual  mortgages  on  realty  located  in  the  juris- 
diction:  Idaho,  Louisiana,  Maine,  Utah. 

The  following  jurisdictions  tax  bonds  secured  by  a  mort- 
gage on  realty  outside  the  State,  but  do  not  tax  individual 
mortgages  on  realty  outside  the  State:  California,  Idaho, 
Utah. 

Rhode  Island,  oddly  enough,  appears  to  tax  individual 
mortgages  on  realty  in  the  State  at  its  classified  rate,  but  to 
exempt  the  bonds  of  coiporations  having  tangible  property 
in  the  State. 

Iowa,  Maryland,  Minnesota,  and  Pennsylvania  pursue  a 


WHERE   SHOULD   TAXES   BE   PAID?    83 

It  is  no  part  of  our  purpose  at  this  point  to  dis- 
cuss the  taxation  of  the  intangible  values  repre- 
sented in  the  stock  of  a  corporation.  We  will  take 
that  up  later  in  an  express  discussion  of  the 
taxation  of  corporations.  So  far  we  are  consider- 
ing corporate  securities  as  being,  like  mortgages, 
representative  of  economic  wealth.  This  seems 
the  proper  place,  however,  to  mention  again  the 
taxation  of  credits  other  than  those  secured  by 
mortgage.  The  fact  of  a  mortgage  seems  imma- 
terial to  the  matter  of  taxation.  The  essential 
thing  is  that  most  business  credits  represent  cap- 
ital invested  in  some  tangible  form  of  property. 

policy  of  classification  of  all  bonds,  and  Connecticut,  New 
York,  and  Michigan  permit  them  to  take  advantage  of  a 
registration  law.  In  Connecticut  this  amounts  to  a  4-mill 
annual  tax.  In  New  York  and  Michigan  it  is  .5  per  cent, 
and  exempts  the  security  from  further  taxation  during  its 
life.  Missouri  follows  its  practice  in  the  case  of  a  mortgage 
and  makes  its  taxation  of  the  bonds  of  corporations,  whose 
property  is  outside  the  State,  depend  on  the  physical  pres- 
ence of  the  evidence  of  the  security  in  the  State.  Since 
this  was  written  Massachusetts  has  enacted  a  statue  (ap- 
proved July  7,  1914)  providing  that  a  bond  secured  by 
mortgage  on  tangible  property  situated  within  or  without 
the  Commonwealth,  which  is  subject  to  taxation  wherever 
situated,  and  which  is  there  actually  taxed,  shall  be  ex- 
empt from  taxation  for  one  year  within  the  Commonwealth, 
if  the  fact  of  the  taxation  of  such  property  is  determined 
by  the  tax  commissioner  and  the  bond  is  registered  by  the 
commissioner  on  receiving  a  fee  of  30  cents  on  the  $100 
par  value.  This  would  amount  to  a  3-mill  annual  tax. 
The  constitutionality  of  this  statue  is  yet  to  be  tested. 


84        PRINCIPLES   OF  TAXATION 

Since  both  realty  and  economic  capital  in  the 
form  of  chattels  enter  alike  into  the  production 
of  wealth,  and  may  be  taken  to  have  a  value  in 
production  represented  by  their  market  price, 
there  does  not  seem  to  be  any  sufficient  reason 
to  distinguish  in  taxation  between  the  represen- 
tatives of  realty  and  of  chattels.  The  question  of 
the  taxation  by  the  community  of  residence  seems 
the  same  whether  the  investment  was  made  di- 
rectly or  indirectly  and  whether  it  was  made  in 
realty  or  in  chattels.  If  there  is  no  tangible 
property  back  of  the  credit,  available,  that  is, 
through  the  various  legal  processes  to  satisfy  the 
debt,  then  the  mere  "legal"  property  imposes 
very  slight  charges  on  the  community  and  no- 
where produces  ability  to  pay. 

A  given  tax,  we  have  seen,  may  be  regarded  as 
having  two  parts,  one  part  levied  according  to 
the  cost  of  government  activity  for  the  benefit 
of  whatever  the  tax  is  levied  on,  the  other  levied 
according  to  considerations  of  ability  to  pay.  If 
we  could  strike  the  line  between  these  parts,  and 
with  the  help  of  the  result  again  divide  that  tax 
which  should  be  paid  on  account  of  ability  into 
two  parts,  one  that  which  should  be  paid  in  a 
community  on  account  of  the  physical  presence 
of  wealth  there,  and  the  other  that  tax  which 
should  be  paid  in  a  community  on  account  of  the 
residence  of  the  owner  of  wealth,  we  should  reach 


WHERE   SHOULD   TAXES   BE   PAID?    85 

a  fair  solution  of  the  problem.  Assuming  that  it 
were  possible  to  make  these  divisions,  levying 
taxes  in  accordance  with  them  would  still  meet 
with  two  great  difficulties,  the  unwillingness  of 
the  community  of  residence  to  let  a  resident  off 
from  taxation  at  anything  less  than  his  full 
ability,  and  the  unwillingness  of  the  community 
in  which  the  tangible  property,  the  wealth,  is 
located  to  let  the  non-resident  owner  off  with 
anything  less  than  his  full  ability  on  account  of 
that  wealth.  The  community  of  residence  of  the 
owner  of  wealth  located  in  another  community  is 
unwilling  to  make  any  allowance  in  the  taxation 
for  the  cost  of  the  property  to  the  community  of 
its  location,  and  insists  on  taxing  its  resident 
just  as  if  his  wealth  were  located  at  his  place  of 
residence  instead  of  elsewhere. 

Though  it  would  probably  be  impossible  to 
reach  an  agreement  as  to  exactly  what  part  of  the 
total  tax  levied  on  wealth  should  be  paid  on 
account  of  the  residence  of  the  owner  and  what 
on  account  of  the  location  of  the  wealth,  still  it 
would  not  seem  impracticable  to  take  these  as 
guiding  principles  in  any  plan  of  taxation.  Our 
argument  would  indicate  that  they  are  the  right 
principles  and  we  can  test  the  fairness  of  taxa- 
tion by  them.  For  example,  we  can  see  that  to 
tax  representatives  of  wealth  any  considerable 
amount  taxes  wealth  held  in  a  representative 


86         PRINCIPLES  OF  TAXATION 

way  disproportionately  to  wealth  held  directly. 
This  is  true  even  after  granting  that  to  tax  it 
somewhat  higher,  on  account  of  the  slight  ex- 
pense the  representative  form  imposes  on  the 
Government,  does  not  tax  it  disproportionately. 
Unless  we  find  some  way  to  separate  the  tax 
on  directly  owned  property  into  that  part  which 
should  be  paid  on  account  of  the  residence  of  the 
owner  and  that  part  which  should  be  paid  on 
account  of  the  location  of  the  wealth,  and  of 
levying  it  accordingly,  and  making  it  equal  to 
that  levied  on  both  accounts  on  wealth  owned 
representatively,  we  should  not  endeavor  to  give 
the  community  of  residence  a  large  tax  on 
account  of  representatively  owned  wealth.  For 
the  present,  to  attempt  to  tax  a  resident  on 
account  of  his  direct  ownership  of  wealth  in 
another  community  probably  presents  too  novel 
an  idea  to  meet  with  any  acceptance.  Directly 
owned  wealth  presents  no  peg  to  hang  the  tax 
on.  A  mortgage,  a  bond,  a  share  of  stock  have 
become  concepts  in  themselves  apart  from  the 
wealth  they  represent.  A  direct  title  to  wealth 
has  not  become  formulated  into  any  such  con- 
cept. Consider  the  case  of  a  resident  owning 
wealth  located  in  the  community  of  his  resi- 
dence. For  the  community  of  his  residence  to 
say  that  a  part  of  his  tax  is  paid  there  on  account 
of  his  residence,  equivalent  to  a  part  which  non- 


WHERE   SHOULD   TAXES   BE   PAID?    87 

resident  owners  pay  in  the  community  of  their 
residence,  would  make  the  total  tax  that  a 
resident  owner  of  local  wealth  pays  in  his  com- 
munity greater  than  the  tax  which  a  non-resident 
owner  pays  there.  It  is  almost  impossible  to 
imagine  a  community  at  present  enduring  such  a 
situation. 

Courts  of  the  community  of  residence  are  open 
for  the  enforcement  of  the  property  rights. 
Since  the  owner  of  the  property  rights  generally 
keeps  the  evidence  of  them  where  he  resides,  the 
community  of  residence  bears  whatever  burden 
of  police  protection  there  is.  So  it  seems  proper 
that  whatever  taxation  is  levied  on  these  repre- 
sentatives of  wealth  should  be  levied  by  the 
community  of  residence.  So  far  as  the  tax  ex- 
ceeds the  cost  to  the  public  on  account  of  the 
form  of  doing  business,  of  owning  the  property, 
we  may  consider  it  that  part  of  the  tax  on  wealth 
to  be  paid  in  the  community  of  residence  rather 
than  in  the  community  where  the  wealth  is 
located.  Unless  some  equivalent  of  this  excess 
is  levied  on  directly  owned  wealth,  whether  the 
owner  resides  in  the  community  where  the  wealth 
is  located  or  not,  we  shall  have  to  consider  the 
tax  as  unequally  levied,  judged  by  any  fair 
principles  of  taxation. 

No  reason  in  principle  appears  for  placing  any 
of  these  representatives  of  property  in  different 


88         PRINCIPLES  OF  TAXATION 

classes  in  any  classification  of  property  for  taxa- 
tion. The  same  principles  apply  to  all,  notes, 
mortgages,  stocks,  and  bonds.  The  most  reason- 
able solution  of  the  tax  problems  they  present 
seems  to  be  for  the  community  of  the  residence 
of  the  owner  to  tax  them  all  alike  at  some  low 
rate.i 

A  tax  on  wealth  to  cover  that  part  of  the  total 
tax  which  should  be  paid  at  the  place  of  the  loca- 
tion of  the  wealth  irrespective  of  the  residence 
of  the  owner,  and  a  tax  on  income  to  cover  that 
part  of  the  total  tax  which  should  be  paid  at 
the  place  of  residence  of  the  owner,  irrespective 
of  the  location  of  the  property,  would  be  one 
answer  to  the  question  of  how  to  tax  the  resident 
owning  wealth  in  another  community  without 
unduly  favoring  the  direct  owner  of  wealth  as 
against  the  man  who  owns  it  representatively 
through  mortgages,  securities,  etc.  We  have 
already  discussed  the  fact  that  a  tax  on  incomes  is 
partly  a  tax  on  risk  rather  than  on  ability  and 
have  seen  some  objections  to  it  as  compared 

^  The  jurisdictions  adopting  this  form,  tax  as  we  have 
seen  at  from  3  to  5  mills  per  annum.  Even  the  lower  of 
these  is  too  high.  Bringing  all  stock  into  the  catagory  of 
taxables  would  in  some  jurisdictions  help  offset  lowering 
the  tax  on  bonds.  On  principle,  stock  should  be  taxed  on  the 
same  basis  as  bonds.  Not  to  tax  stock  and  to  tax  bonds 
tends  to  force  investment  funds  into  the  channel  of  the  more 
speculative  investments.  This  is  not  fair  to  the  conserva- 
tively inclined  investors.  . 


WHERE  SHOULD   TAXES   BE   PAID?    89 

with  a  tax  on  wealth  at  its  market  value.  It  will 
not  be  possible  to  solve  the  problem  in  this  or 
any  other  way  until  there  is  a  general  agreement 
as  to  the  proportion  of  the  tax  belonging  to  loca- 
tion of  wealth  and  the  proportion  belonging  to 
place  of  residence  of  the  owner. 


CHAPTER  V 

HOW   SHOULD  TAXES   BE   ASSESSED? 

Communities  are  coming  to  an  understanding 
of  the  weaknesses  of  the  system  of  locally  elected 
assessors  usual  throughout  the  United  States. 
It  is  simply  human  for  a  man  to  desire  to  please 
those  who  have  elected  him  and  those  on  whom 
his  continuance  in  ofhce  depends,  and  the  desire 
to  please  may  often  work  counter  to  that  strict 
justice  with  which  assessments  should  be  made. 
This  fact  makes  a  special  objection  to  elective 
assessors  in  addition  to  the  many  general  ob- 
jections to  elective  administrative  officers.  The 
value  of  experience  is  not  greater  in  any  occupa- 
tion than  in  that  of  the  assessor. 

Boards  of  equalization 

First  efforts  made  to  correct  the  evils  of  a  sys- 
tem of  locally  elected  assessors  take  the  form  of 
central  boards  of  control,  often  called  boards  of 
equalization.  These  state  boards  vary  in  power 
from  merely  nominal  authority  to  a  large  measure 
of  control.  It  takes  the  form  of  a  right  to  correct 
the  findings  of  the  local  assessors  and  sometimes 


ASSESSMENT   OF  TAXES  91 

to  instruct  them  and  to  supervise  their  work.  A 
good  board  with  real,  authority  can  accomplish 
a  great  deal. 

Though  giving  such  boards  a  right  of  review 
over  the  findings  of  the  local  assessor,  and  some 
measure  of  authority  over  him,  lessens  the  evil 
of  the  elective  nature  of  the  office,  it  does  not  do 
away  with  it.  It  would  seem  desirable  to  abolish 
the  system  of  elective  assessors  and  establish  an 
entirely  central  administration  of  all  assessments 
in  the  State  and  central  appointment  of  all  assess- 
ors. In  order  to  secure  the  benefit  of  a  knowledge 
of  local  values  it  would  undoubtedly  be  desirable 
to  appoint  local  men.  Such  a  man  appointed  by 
a  central  authority  and  having  a  permanent 
tenure  of  office  would  be  in  a  vastly  different 
position  from  the  same  man  elected  for  short 
terms  by  his  neighbors  whom  he  is  going  to 
assess.  He  might  not  be  altogether  removed  from 
the  tendency,  for  example,  to  assess  the  property 
of  non-residents  more  heavily  than  that  of  his 
resident  neighbors,  but  that  and  other  undesir- 
able tendencies  would  be  checked.  (By  way  of 
an  aside  it  may  not  be  inappropriate  to  remark 
on  the  tendency  of  communities  to  be  eager  in 
their  invitation  to  foreign  capital  and  inhospitable 
to  it  after  its  coming.) 


92         PRINCIPLES  OF  TAXATION 

Central  administration  more  readily  supplies 
desirable  special  expert  knowledge 

In  a  centralized  system  of  assessment  it  would 
be  easier  to  supply  that  expert  knowledge  neces- 
sary for  the  proper  appraisal  of  special  classes  of 
property.  No  one  man,  or  even  several  men,  can 
possibly  have  the  knowledge  necessary  for  mak- 
ing a  correct  valuation  of  all  the  varieties  of 
wealth  in  modern  economic  communities.  To 
value  land  alone  calls  for  a  high  degree  of  expert 
skill.  It  is  hardly  possible  that  a  man  capable  of 
valuing  land  and  making  an  approximate  ap- 
praisal of  the  value  of  the  common  structures 
should  have  the  skill  necessary  to  value  any  of 
the  other  common  forms  of  property.  A  central 
administration  could  supply  the  expert  knowl- 
edge necessary  to  assess  factories,  mines,  timber- 
lands,  stocks  of  goods,  securities,  or  whatever 
property  there  might  be  in  a  community  for 
assessment. 

We  shall  later  discuss  briefly  the  separation  of 
the  sources  of  state  and  local  revenue.  It  may  be 
stated  here,  however,  that  the  system,  even  more 
general  formerly  than  it  now  is,  of  raising  all  or 
most  of  a  State's  revenue  by  simply  imposing  in 
one  way  or  another  the  state  tax  on  the  local 
assessment,  leads  to  special  endeavor  on  the 
part  of  locally  elected  assessors  to  give  their  com- 


ASSESSMENT   OF  TAXES  93 

munities  a  low  total  assessment.  The  lower  the 
assessment  of  a  particular  community  the  smaller 
the  state  tax  it  would  pay.  So  far  as  a  State  con- 
tinues to  raise  its  revenue  by  this  method,  the 
central  appointment  and  control  of  assessors 
would  remedy  the  evil. 

Assessment  should  be  at  full  value 

With  this  brief  mention  of  the  administrative 
machinery  of  taxation  we  may  go  on  to  a  short 
consideration  of  the  assessment  itself.  Some 
people  consider  that  it  is  immaterial  at  what  rate 
property  is  assessed  provided  it  is  all  assessed  at 
the  same  rate.  They  would  say  it  makes  no  dif- 
ference whether  the  property  is  assessed  at  fifty 
per  cent  of  its  real  value  and  taxed  two  per  cent 
on  that  value,  or  is  assessed  at  one  hundred  per 
cent  of  its  value  and  taxed  one  per  cent.  I  am 
unable  to  agree  that  it  makes  no  difference. 
Anything  that  obscures  the  facts  Is  undesirable 
just  because  it  does  obscure  them.  If  a  commun- 
ity raises  its  public  revenue  by  a  tax  on  the  value 
of  wealth,  it  is  important  to  know  just  what 
percentage  of  that  wealth  is  taken  each  year.  If 
it  is  important  to  know  that  fact  at  all,  anything 
tending  to  make  the  fact  more  quickly  and  clearly 
apparent  is  important. 

An  assessment  at  full  value  tends  to  a  fairer 
assessment  than  one  at  anything  less  than  full 


94         PRINCIPLES  OF  TAXATION 

value.  If  the  assessments  are  at  full  value,  In- 
equalities become  at  once  more  apparent. 
There  is  not  the  obscuring  necessity  of  going 
through  a  mathematical  computation  to  see  just 
what  the  real  situation  is.  Actual  things  are  more 
or  less  known  things  and  current  topics  of  remark. 
They  are  not  stated  or  thought  of  in  terms  of 
half  the  value.  If  Smith's  house  and  lot  are 
worth  $10,000  and  are  assessed  at  that,  while 
Brown's  house  and  lot,  also  worth  $10,000,  are 
assessed  at  only  $9000,  Smith  is  more  likely  to 
notice  and  object  to  the  discrepancy  than  he 
would  be  if  his  house  was  assessed  at  $5000  and 
Brown's  at  $4500.  As  appears  from  this  example, 
the  unfairness  does  not  seem  as  important  on  the 
fifty  per  cent  assessment  basis  as  it  does  on  the 
one  hundred  per  cent  basis. 

Why  securities  should  be  assessed  at  market  value 

Securities  should  be  assessed  at  their  actual 
market  value  just  the  same  as  any  other  prop- 
erty. Ordinary  real  estate  mortgages  may  fairly 
be  taken  at  par.  They  are  regularly  placed  at 
par,  that  is  the  mortgage  is  given  to  cover  the 
actual  amount  advanced  and  the  interest  rate  is 
adjusted  to  take  care  of  the  varying  elements  of 
risk  and  the  changing  values  of  capital.  Since 
they  run  for  relatively  short  terms  they  are 
kept  constantly  adjusted  to  changing  conditions. 


ASSESSMENT   OF  TAXES  95 

Par  always  represents  practically  the  market 
price.  The  situation  is  very  different  with  securi- 
ties. Corporations  often  issue  bonds  below  par, 
and  sometimes  above  par.  During  their  life 
conditions  both  within  and  without  the  corpora- 
tion may  change  so  much  that  the  issue  price 
may  have  little  to  do  with  present  value.  This  is 
even  more  noticeable  with  stocks  than  with 
bonds.  Only  an  appraisal  of  value  affords  a  fair 
basis  for  taxation.  Appraising  the  value  of  secu- 
rities is  no  more  difficult  than  appraising  the 
value  of  real  estate. 

The  market  should  be  the  basis  of  estimating 
value  for  assessment.  Market  value  expresses 
the  consensus  of  opinion  as  to  actual  value. 
Probably  market  value  approximates  real  value 
nearer  than  the  opinion  of  any  individual  could 
for  a  whole  class  of  property.  In  many  cases  it  is  a 
fact  much  easier  to  arrive  at  than  an  appraisal 
based  on  an  individual  opinion,  which  must 
ascertain  many  facts  on  which  to  base  the 
opinion. 

Since  our  discussion  is  concerned  mainly  with 
what  constitutes  fair  taxation,  we  will  not  go 
into  these  questions  of  administration  further. 
Difficulties  of  administration  may  sometimes 
make  what  would  be  a  fair  tax  inexpedient  in 
practice. 


CHAPTER  VI 

SHOULD  STATE  AND  LOCAL  TAXATION  BE 
KEPT   APART? 

Current  theory  and  practice  In  taxation  tend 
to  separate  the  sources  of  state  and  local  revenue. 
Two  forces  have  worked  to  produce  this  tendency. 
We  have  already  referred  to  one.  It  is  the  unfor- 
tunate effect  on  local  assessments  of  superimpos- 
ing the  state  tax  on  the  same  property  and  under 
the  same  assessment  as  the  local  tax.  This 
method  of  raising  the  state  revenues  produces 
a  constant  effort  on  the  part  of  one  community 
to  gain  an  advantage  over  another  by  means  of 
underassessments.  Some  States  have  sought  to 
reach  this  by  limiting  the  tax  rate  a  community 
might  impose.  Even  boards  of  equalization  have 
not  in  general  been  able  wholly  to  remedy  the 
evil.  So  one  way  out  of  the  difficulty,  or,  at  least, 
of  lessening  it,  has  been  sought  through  having 
the  State  reserve  to  itself  certain  subjects  of 
taxation.  Centralizing  tax  administration  would 
seem  the  nearest  means  of  meeting  this  situation. 
The  natural  development  of  certain  special  taxes 
and  the  growth  of  certain  forms  of  wealth,  which 
do  not  lend  themselves  readily  to  local  assess- 
ment and  taxation,  has  been  the  other  force 


STATE  AND   LOCAL  TAXATION     97 

tending  to  the  segregation  of  certain  subjects 
for  state  taxation.  Centralizing  administration 
would  partly,  but  only  partly,  overcome  these 
difficulties  of  assessment  and  taxation.  Such 
special  taxes  as  those  mentioned,  as,  for  example, 
a  tax  on  motor  vehicles,  or  the  inheritance  tax, 
seem  partly  to  have  developed  of  themselves  and 
partly  to  have  come  from  a  desire  to  find  subjects 
for  state  taxation  separate  from  the  subjects  of 
local  taxation.^ 

^  New  York  especially  has  gone  far  in  the  segregation  of 
subjects  for  state  taxation  and  endeavors  to  raise  the  entire 
revenues  for  the  enormous  state  expenditures  in  this  way. 
In  1912  its  sources  of  revenue  were  as  follows:  — 

Corporation  taxes,  produced $10,349,164.76 

Tax  on  organization  of  corporations 472,959.81 

Inheritance  tax                produced 12,153,188.84 

Stock  transfer  tax                    "       3,653,037.24 

Secured  debt  tax                      "       1,41 1,567.60 

Mortgage  recording  tax          "       3,704,648.90 

Tax  on  motor  vehicles           "       1,053,762.25 

Bank  tax                                "       4,528,705.85 

$37-327,026.25 

Other  States  conspicuous  for  the  absence  of  a  general 
property  tax  for  state  purposes  are  New  Jersey  and  Dela- 
ware. 

By  way  of  indicating  in  part  some  of  the  segregation  of 
corporate  property  for  state  taxation,  and  in  part  the  cen- 
tral assessment  of  certain  property,  though  the  taxation  is 
partly  for  local  purposes,  the  practice  of  several  jurisdic- 
tions with  regard  to  certain  classes  of  corporations  is  indi- 
cated below :  — 

Maine:  —  State  taxes  gross  receipts  of  palace  car  and 


98         PRINCIPLES  OF  TAXATION 

Sofne  subjects  of  taxation  do  not  lend  themselves  to 
local  assessment 

Some  subjects  certainly  do  not  lend  themselves 
to  local  assessment.  The  absurdity  of  the  assess- 
express  companies;  State  assesses  railroads  and  street  rail- 
ways, telegraph  and  telephone  companies,  on  basis  of  gross 
receipts,  retains  part  of  the  tax,  and  distributes  the  rest  to 
the  local  communities. 

New  Hampshire:  —  State  assesses  property  of  street 
and  steam  railways,  collects  the  tax,  reserves  part  of  it  for 
state  purposes  and  distributes  the  rest  locally.  The  State 
taxes  exclusively  for  state  purposes  the  property  of  tele- 
graph, telephone,  express,  and  car  companies,  except  that 
their  real  estate  not  used  in  their  ordinary  business  is  taxed 
locally. 

Vermont:  —  Transportation  and  transmission  compan- 
ies, other  than  palace  car  and  express  companies,  have  the 
option  of  being  taxed  on  property  or  on  gross  earnings.  The 
taxation  is  for  state  purposes.  Express  companies  are  taxed 
by  the  State  for  state  purposes  on  the  mileage  of  their  route 
and  palace  car  companies  on  their  capital  used  in  the  State. 

Ohio:  —  All  property  of  steam,  street,  suburban,  and 
interurban  railroad  companies,  as  assessed  by  the  State  Tax 
Commission,  is  taxed  locally  for  state  and  local  purposes 
under  the  general  property  tax.  Real  estate  necessary  for 
the  daily  operation  of  the  railroad  is  treated  as  personalty; 
other  real  estate  is  taxed  like  that  of  individuals.  In  addi- 
tion to  the  general  property  tax,  railroads  pay  to  the  State 
for  state  purposes  a  tax  on  gross  earnings.  The  entire  prop- 
erty of  express,  telegraph,  and  telephone  companies  is  as- 
sessed by  the  State  Tax  Commission  on  the  basis  of  the 
market  value  of  the  capital  stock.  Then  the  proportional 
value  of  the  property  within  the  State  is  determined  on  a 
mileage  basis  and  is  taxed  under  the  general  property  tax 
for  state  and  local  purposes  after  deducting  the  value  of  the 
real  estate  owned  and,  taxed  in  Ohio.    Besides  this  general 


STATE   AND   LOCAL  T.AXATION     99 

ors  in  each  local  community  making  an  assess- 
ment of  the  property  located  in  that  community 
of  a  railroad  running  through  it  is  apparent.  The 
local  assessors  have  no  technical  knowledge  to 
help  them  in  estimating  the  value  of  a  property. 
However  skilled  they  might  be,  they  could  not 
value  a  piecemeal  part  of  a  whole  system.  Such 
delicate  questions  arise  as  the  taxation  of  cars 
and  locomotives  constantly  passing  from  one 
community  to  another.  Obviously  the  same  diffi- 
culties come  up  in  the  assessment  of  express  com- 
panies, telegraph  and  telephone  companies,  pipe 
lines,  or  any  other  property  that  is  not  local  in  its 
essential  character.  A  fair  assessment  can  be 
made  only  by  considering  the  property  as  a  whole. 
So  it  seems  logical  that  here,  if  nowhere  else,  the 
central  authority  should  make  the  assessment 
and,  perhaps,  collect  the  tax.  How  much  of  the 
tax  the  State  should  keep  might  depend  on  the 

property  tax  all  these  corporations  pay  a  tax  on  gross  earn- 
ings to  the  State  for  state  purposes. 

Minnesota:  —  Steam  railroads  are  taxed  4  per  cent, 
telephone  companies  at  3  per  cent,  express  and  freight  line 
companies  at  6  per  cent  on  gross  earnings.  These  taxes  are 
regarded  as  taxes  on  property  and  are  paid  to  the  State 
for  state  purposes.  They  are  in  lieu  of  all  other  taxes,  ex- 
cept the  general  property  tax  paid  locally  for  state  and 
local  purposes  on  property  not  used  in  the  business. 

Total  state  taxes  and  amounts  contributed  by  certain 
specified  sources  of  taxation  in  New  England,  Middle  Atlan- 
tic and  Eastern  Central  groups  are:  — 


lOO      PRINCIPLES  OF  TAXATION 


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STATE  AND   LOCAL  TAXATION    loi 

State's  need  of  revenue.  The  precise  manner  of 
returning  taxes  to  the  local  communities  varies 
and  involves  too  many  considerations  for  discus- 
sion within  the  limits  of  this  essay.  ^ 

^  New  Hampshire:  —  Taxes  received  from  railroads  are 
distributed  as  follows:  — 

1.  One  fourth  to  the  towns  in  which  the  railroad  is  lo- 
cated to  be  prorated  upon  the  basis  of  the  amount  ex- 
pended by  the  railroad  in  each  town  for  building  and  right 
of  way,  as  shown  by  a  return  from  the  railroad  to  the  State 
Treasurer. 

2.  Of  the  remainder  (three  fourths)  each  town  receives  a 
part  proportioned  to  the  number  of  shares  held  by  its  resi- 
dents. The  selectmen  of  each  town  notify  the  State  Trea- 
surer of  the  names  of  such  stockholders  and  the  number  of 
shares  held  by  each.  The  treasurer  of  each  railroad  also 
transmits  to  the  State  Treasurer  a  similar  list  of  stock- 
holders by  towns. 

3.  Usually  an  amount  still  remains,  represented  by  the 
stock  held  outside  the  State,  and  this  remainder  is  retained 
by  the  State  for  its  own  use. 

Connecticut:  —  Steam  railroads  located  in  Connecticut 
pay  to  the  State,  for  state  purposes,  i  per  cent  of  the  market 
value,  on  a  given  date,  of  the  capital  stock  and  i  per  cent 
of  the  par  value  of  the  railroad's  funded  and  floating  in- 
debtedness, or  if  the  indebtedness  is  less  than  par,  then  the 
determined  value  of  such  indebtedness.  Taxes  locally  paid 
upon  real  estate  not  used  for  railroad  purposes  are  deducted. 
This  payment  is  in  lieu  of  all  other  taxes  on  the  franchises- 
funded  and  floating  debt,  and  property  of  railroads  in  the 
State. 

New  Jersey:  —  The  State  Board  of  Assessors  annually 
ascertains  on  the  following  basis  the  true  value  of  all  prop- 
erty used  for  railroad  or  canal  purposes,  including  fran- 
chises: — 

I.  The  length  and  value  of  the  main  stem  of  each  rail- 


I02      PRINCIPLES   OF  TAXATION 

It  should  be  remarked  in  this  connection  that 
care  should  be  taken  in  the  segregation  of  such 

road,  and  of  the  waterway  of  each  canal,  and  the  length  of 
such  in  each  taxing  district. 

2.  The  value  of  the  other  real  estate  used  for  railroad  or 
canal  purposes  in  each  taxing  district,  including  the  road- 
bed (other  than  main  stem),  waterways,  reservoirs,  tracks, 
buildings,  waterworks,  riparian  rights,  docks,  wharves, 
piers,  and  all  other  real  estate,  except  lands  not  used  for 
railroad  and  canal  purposes. 

3.  The  value  of  all  the  tangible  personal  property  of  each 
railroad  and  canal  company. 

4.  The  value  of  the  remaining  property,  including  the 
franchise. 

In  1906  the  "main  stem"  was  declared  hereafter  "to  in- 
clude the  roadbed,  not  exceeding  100  feet  in  width,  with 
its  rails  and  sleepers,  and  all  structures  erected  thereon  and 
used  in  connection  therewith,  not  including,  however,  any 
passenger  or  freight  building  erected  thereon." 

The  taxes  on  the  property  included  in  2,  and  known  as 
"second-class"  railroad  property,  are  assessed  and  col- 
lected by  the  State,  but  the  entire  amount  is  paid  over  to 
the  local  taxing  districts,  giving  each  the  tax  derived  from 
such  property  situated  therein. 

Illinois:  —  All  steam  and  electric  railroads,  except  the 
Illinois  Central  Railroad,  are  subject  to  the  general  prop- 
erty tax  for  both  State  and  local  purposes.  To  the  assessed 
valuation  of  domestic  roads  is  added  the  assessment  of  the 
excess  value  of  their  capital  stock,  including  franchise. 

With  respect  to  assessments,  steam  and  electric  railroad 
property  may  be  classified  as  — 

1.  Property  (including  "capital  stock  and  franchise") 
assessed  by  the  State  Board  of  Equalization;  and 

2.  Property  assessed  locally. 
Class  I  consists  of  — 

(a)  "  Railroad  track,"  which  is  taxed  as  real  estate,  and 
embraces  right  of  way,  including  all  tracks,  superstruc- 


STATE  AND   LOCAL  TAXATION    103 

properties  as  the  railroads,  telegraphs,  etc.,  for 
assessment  and  taxation  by  the  State  that  this 
property  is  treated  on  a  level  with  property 
locally  assessed.  Some  jurisdictions  endeavor  in 
a  measure  to  take  care  of  this  by  providing  that 
the  rate  of  taxation  shall  be  an  average  of  the 
local  rates  throughout  the  State. ^  This  presents 

tures,  buildings,  and  improvements  located  thereon.  The 
value  of  buildings  and  the  value  per  mile  of  main,  second 
main,  and  side  tracks  are  separately  assessed  by  the  Board. 
Distribution  to  counties  through  which  the  road  passes 
is  made  upon  the  basis  of  the  length  of  various  kinds  of 
track  in  each  county,  multiplied  by  their  respective  assessed 
values  per  mile,  plus  the  assessed  value  of  buildings  therein. 

(6)  "Rolling  stock;"  and 

(c)  "Capital  stock,  including  franchise." 

Both  (b)  and  (c)  are  taxed  as  personal  property  and  dis- 
tributed in  such  proportion  as  the  length  of  main  track  in 
each  county  bears  to  the  total  length  of  main  track  in  the 
State. 

Distributions  by  county  officials  to  municipalities  and 
local  districts  are  made  on  a  basis  similar  to  distributions 
by  the  State  Board  to  counties. 

Class  2  consists  of  all  property  not  included  in  Class  i, 
and  is  assessed  locally.  The  information  in  this  and  other 
footnotes  in  this  chapter  has  been  taken  principally  from 
the  reports  of  the  Commissioner  of  Corporations  on  the 
Taxation  of  Corporations. 

^  In  Wisconsin,  for  example,  the  Tax  Commission  deter- 
mines the  average  rate  of  taxation  by  dividing  the  aggre- 
gate taxes  levied  on  the  general  property  in  the  State  for 
all  purposes  (except  assessments  for  local  improvements) 
by  the  true  cash  value  of  such  property  as  ascertained  by 
the  Commission.  The  quotient  thus  oljtained  constitutes 
the  average  rate  of  taxation.  It  should  be  noted  that  as- 
sessment is  especially  centralized  in  Wisconsin. 


I04      PRINCIPLES   OF  TAXATION 

another  reason  for  insisting  that  all  assessments 
be  at  the  full  value  of  the  property,  and  shows 
further  advantages  of  a  centralized  administra- 
tion of  all  assessments. 

There  hardly  seems  to  be  an  adequate  reason 
for  taxing  railroad,  telegraph  and  telephone,  and 
other  properties  that  are  not  local  more  or  less 
than  manufacturing  and  other  properties  that 
are  local.  Even  assuming  that  a  railroad,  say, 
can  shift  the  incidence  of  the  tax  and  collect  it 
from  passengers  and  shippers  in  the  rates  it 
makes,  there  is  no  reason  for  making  such  a  pub- 
lic service  corporation  a  medium  for  the  collec- 
tion of  taxes,  or  for  the  users  of  transportation  to 
be  especially  taxed.  Besides,  the  assumption  that 
the  public  service  corporation  can  shift  the  inci- 
dence of  the  tax  is  not  necessarily  true  in  view  of 
the  fact  of  supervision  of  rates  by  the  Interstate 
Commerce  Commission  and  other  public  service 
commissions.  The  interests  of  clarity  are  served 
by  keeping  the  taxation  of  these  properties  on  the 
same  level  as  the  taxation  of  local  property.  ^ 

1  The  following  indicates  the  method  of  assessment  of 
railroad  property  in  a  number  of  the  States:  — 

Maine:  —  The  State  taxes  gross  receipts  for  state  and 
local  purposes. 

New  Hampshire:  —  The  State  assesses  on  the  value  of 
the  property,  collects  the  tax,  and  distributes  proceeds  to 
local  communities. 

Vermont:  —  The  State  taxes  property  or  gross  earnings 
(at  the  option  of  the  railroad)  for  state  purposes. 


STATE  AND   LOCAL  TAXATION    105 

Assessing  corporations  at  market  value 

It  is  hard  to  see  why  market  value  should  not 
be  taken  as  the  basis  of  assessment  of  these  state- 

Massachusetts:  —  The  State  taxes  only  on  corporate 
excess  for  state  purposes. 

Rhode  Island: —  The  railroads  are  taxed  locally. 

Connecticut:  —  The  railroads  pay  the  State  one  per 
cent  on  the  market  value  of  stock  and  bonds  for  state  pur- 
poses. 

New  York:  —  Railroads  are  taxed  locally  on  tangible 
property;  by  the  State  on  corporate  excess  and  gross  earn- 
ings. 

New  Jersey:  —  The  State  taxes  on  value  of  property. 

Pennsylvania:  —  The  raihoads  are  taxed  locally.  The 
State  taxes  them  on  capital  stock  and  8  per  cent  on  gross 
receipts  for  state  purposes. 

Delaware:  —  The  railroads  commute  taxes  to  the 
State  by  paying  certain  lump  sums.  The  roadbed  is  exempt 
from  local  taxation;  all  other  realty  is  taxed  locally. 

Maryland:  —  The  State  taxes  railroads  on  gross  re- 
ceipts; they  are  taxed  locally  on  real  and  personal  property. 

Ohio:  —  The  State  assesses  railroads  on  the  value  of 
their  property;  the  tax  is  collected  locally.  The  State  taxes 
them  for  state  purposes  on  intrastate  gross  earnings. 

Indiana:  —  Railroads  are  assessed  and  taxed  locally. 

Illinois:  —  Railroads  are  assessed  and  the  tax  collected 
by  the  State  on  value  of  property  and  on  corporate  excess. 
The  proceeds  of  the  tax  are  distributed  locally. 

Michigan:  —  Railroads  are  assessed  by  the  State  on  the 
value  of  their  property,  including  intangible  values.  The 
tax  is  collected  by  the  State  and  expended  by  it. 

Wisconsin:  —  Railroads  are  assessed  by  the  State  on  the 
value  of  their  property,  including  intangible  values.  The 
tax  is  collected  by  the  State  and  expended  by  it. 

Minnesota:  —  Railroads  are  taxed  exclusively  by  and 
for  the  State  on  the  basis  of  gross  earnings. 


io6      PRINCIPLES  OF  TAXATION 

wide  properties  as  well  as  of  local  properties. 
Certainly  railways,  telephone  lines,  and  like 
widely  extended  properties  are  not  generally 
bought  and  sold  like  houses  and  lots,  at  one  com- 
plete purchase  price.  But  fractions  of  their  value 
are  sold  with  great  frequency  in  the  form  of  sales 
of  shares  of  stocks  and  bonds.  Those  prices  indi- 
cate the  consensus  of  opinion  on  the  value  of  the 
property.  They  are  the  market  price  of  the  prop- 
erty. The  fact  that  the  property  is  so  large  and 
its  legal  ownership  in  the  corporate  form  such 
that  it  does  not  have  a  market  price  in  its  entirety 
should  not  obscure  the  essential  situation.  An 
assessment  based  on  the  market  value  of  stocks 
and  bonds  probably  comes  much  nearer  to  finding 
the  value  in  production  of  the  property  than  any 
other  form  of  assessment  can  come.  The  relative 
ease  of  making  the  assessment  should  recommend 

North  Dakota:  —  Railroads  are  assessed  by  the  State 
on  the  value  of  their  property,  including  intangible  values. 
The  tax  is  collected  locally. 

South  Dakota:  —  The  State  assesses  railroads  on  the 
value  of  their  property,  including  intangible  values.  The 
tax  is  collected  locally. 

Iowa:  —  Railroads  are  assessed  by  the  State  and  the  tax 
is  collected  locally. 

Nebraska:  —  Railroads  are  assessed  by  the  State. 
The  tax  is  collected  locally. 

Kansas:  —  Railroads  are  assessed  by  the  State.  The 
tax  is  collected  locally. 

Missouri:  —  Railroads  are  assessed  by  the  State.  The 
tax  is  collected  locally. 


STATE  AND   LOCAL  TAXATION     107 

it.  Whatever  reasons  there  may  be  for  making 
elaborate  physical  valuations  of  public  service 
properties,  for  consideration  in  determining  rates 
by  public  service  commissions,  they  have  no 
application  to  the  matter  of  taxation.  Value  in 
production  to  the  individuals  owning  the  prop- 
erty depends  very  largely  on  the  rates  permitted. 
To  take  such  a  value  in  production  as  a  basis  for 
making  the  very  rates  which  determine  it  would 
be  traveling  in  a  circle  and  arriving  nowhere. 
Under  an  existing  set  of  circumstances,  however, 
value  in  production  is  a  definite  thing,  and  the 
estimate  of  it  by  the  market  price  the  best  avail- 
able for  purposes  of  taxation. 

Assessing  on  value  of  stock  and  bonds  includes 
intangible  values  on  which  an  individual  property 
owner  is  not  subject  to  taxation 
Such  an  estimate  does  have  a  large  element  of 
unfairness.     It   includes  other  things  than   the 
value  of  the  economic  wealth,  the  tangible  prop- 
erty,  used  in  production.     It  includes  the  so- 
called  intangible  values,  the  special   skill  of  a 
particular  management,  the  good-will  of  a  busi- 
ness.   The  securities  of  a  corporation  represent 
more  than  their  proportionate  ownership  of  the 
tangible  property  of  the  corporation ;  they  carry 
also  these  intangible  values.    Market  prices  of 
privately  owned  wealth  represent  only  the  value 


io8      PRINCIPLES   OF  TAXATION 

in  production  of  the  tangible  property.  They 
often  do  represent  location  values  just  as  truly  as 
public  service  corporation  franchises.  There  can 
be  only  four  corners  to  the  intersection  of  Forty- 
second  Street  and  Fifth  Avenue  in  New  York. 
They  do  not  carry  skill  of  management  and  good- 
will. To  this  extent  to  value  corporate  property 
on  the  market  price  of  the  corporate  securities 
may  be  to  place  too  high  a  value  on  it  as  com- 
pared with  individually  owned  property.  It  may 
be  that  the  skill  of  management  is  not  above  the 
average,  and  that  there  is  no  special  good-will. 
In  that  case  the  corporate  property  would  not 
be  taxed  more  than  private  property.  Manage- 
ment might  be  below  the  average  and  the  good- 
will amount  to  nothing  or  be  postively  bad-will. 
Then  the  market  price  of  the  securities  would 
give  a  value  below  the  actual  value  of  the  tangible 
property  in  the  process  of  production. ^ 

In  our  later  consideration  of  the  taxation  of 
corporations  we  shall  discuss  the  special  taxation 
of  intangible  values  in  the  so-called  corporate 
excess  taxes. 

State  taxation  of  inheritances 

We  shall  discuss  only  one  of  the  many  special 
state  taxes,  the  taxation  of  inheritances.    This 

^  As  indicated  in  an  earlier  footnote  Connecticut  follows 
this  method  of  assessing  railroad  corporations. 


STATE  AND   LOCAL  TAXATION     109 

has  become  so  common  and  so  important  a  form 
of  taxation  that  it  calls  for  special  comment.  At 
first  thought  it  does  not  fit  into  either  of  the  basic 
theories  of  taxation,  cost  to  the  Government  or 
ability  to  pay.  Though  sustaining  the  legal  right 
to  inherit  does  cost  the  Government  something, 
there  is  no  inheritance  tax  that  does  not  go  beyond 
this  special  charge.  A  given  item  of  wealth  is  not 
more  valuable  in  production,  that  is,  does  not 
essentially  create  more  ability  to  pay,  by  virtue 
of  the  process  of  passing  from  one  ownership  to 
another  because  of  death  than  by  the  transfer 
from  one  ownership  to  another  during  the  life 
of  the  former  owner.   Looking  at  the  tax  from 
the  viewpoint  of  a  longer  period  of  time  than  the 
annual  one,  however,  makes  it  appear  more  in 
accord  with  these  basic  theories.   That  body  of 
privately  owned  wealth  which  is  continuous,  the 
capital  fund,  so  to  speak,  must  pass  by  inheri- 
tance with  the  average  frequency  of  the  average 
human   life.    From  this  viewpoint   the   inheri- 
tance tax  becomes  simply  an  addition   to  the 
regular  annual  tax  on  wealth.    One  might  look 
on  it  as  a  deferred  tax,  that  is,  a  tax  which 
might  have  been  imposed  in  annual  installments 
through  the  preceding  term  of  years  during  which 
any  change  of  ownership  was  inter  vivos.  Or  one 
might  look  at  it  as  an  anticipatory  tax,  paid  in 
advance  for  the  next  term  of  years  during  which 


no      PRINCIPLES  OF  TAXATION 

transfers  inter  vivos  would  be  the  only  changes  of 
ownership.  Interesting  as  this  may  be  as  a  mat- 
ter of  speculation,  its  bearing  is  on  the  amount 
rather  than  on  the  nature  of  the  tax.  In  any 
event,  the  wealth  is  owned  with  the  knowledge 
that  this  tax  will  have  to  be  paid.  The  tax  is  dis- 
counted in  the  consideration  of  the  value  of  the 
property  for  private  purposes.  Of  that  total 
value  of  the  property  in  production  a  certain 
part  of  the  product  will,  in  the  long  run,  go  to 
public  rather  than  to  private  purposes. 

Looking  at  the  tax  in  this  way,  it  is  immaterial 
also  from  the  viewpoint  of  the  nature  of  the  tax 
whether  it  is  considered  a  tax  on  the  ability  of  the 
preceding  or  of  the  succeeding  owner.  Though 
the  wealth  may  be  inherited  in  the  form  of  its 
representative  intangible  property,  which  ordin- 
arily is  taxed  at  the  domicile  of  the  taxpayer,  an 
inheritance  of  such  property  is  not  taxed  at  the 
domicile  of  the  person  inheriting.  One  amply 
sufficient  practical  reason  is  that  the  jurisdic- 
tion of  the  person  inheriting  has  no  such  avail- 
able means  as  the  probating  of  the  estate  of  the 
testator  or  intestate  to  learn  of  the  inheritance 
and  to  enforce  the  tax.  Though  this  may  be 
the  practical  reason,  the  result  might  be  pointed 
to  as  supporting  an  argument  that  the  tax  is  a 
deferred  one. 

By  taking  this  longer  view  we  can  bring  the 


STATE   AND   LOCAL  TAXATION     in 

tax  within  the  ordinary  tax  theories.  The  tax  is 
more  popular  than  most.  Perhaps  both  the  per- 
son leaving  the  inheritance  and  the  person  receiv- 
ing it  feel  the  same  doubt  we  have  mentioned  as 
to  which  is  really  paying  the  tax.  At  any  rate, 
the  person  leaving  the  inheritance  is  in  no  posi- 
tion to  object  and  the  person  receiving  it  is  in  no 
mood  to  object.  The  tax  is  even  more  popular, 
possibly,  with  those  who  have  no  connection 
with  it.  The  adventitious  opportunity  afforded 
by  inherited  wealth  is  one  of  the  very  important 
causes  of  the  Socialist's  objection  to  the  social 
utility  of  private  property.  The  usual  progressive 
form  of  this  taxation  affords  an  instance  of  plac- 
ing more  stress  on  ability  to  pay  than  most  forms 
of  taxation.  This  again  extends  the  number  of 
those  who  approve  the  taxation. 

In  practice  the  tax  has  been  given  defects  that 
should  be  done  away  with.  It  is  especially  adapt- 
able to  piracy  among  the  States  in  taxation.  We 
have  already  noticed  the  tendency.  The  piracy 
takes  the  form  of  levying  the  tax  on  such  intan- 
gible property  ^  f  non-resident  decedents  as  the 
State  can  get  any  jurisdiction  over  to  enforce  the 
tax.  As  we  have  seen,  so  far  as  intangibles  are 
taxed  they  should  be  taxed  at  the  domicile  of  the 
owner.  Suppose  the  case  of  a  testator  whose 
residence  is  in  the  State  of  A  levying  stock  in  a 
corporal 'on  of  the  State  of  B.  The  estate  prop- 


112      PRINCIPLES  OF  TAXATION 

erly  pays  a  tax  in  the  State  of  the  testator's 
domicile.  But  the  State  of  incorporation  often 
steps  in  and  claims  a  tax  also  on  the  ground  that 
if  the  tax  is  not  paid  the  State  can  prevent  the 
transfer  of  the  stock.  In  like  manner  States  get 
jurisdiction  over  the  transfer  of  registered  bonds, 
or  of  the  physical  presence  within  the  State  of 
the  evidence  of  the  intangible  property  as  the 
certificate  for  the  stock. » 

^  Among  the  States  taxing  the  intangibles  of  non-resi- 
dents are:  Colorado,  Illinois,  Iowa,  Maine,  Michigan,  New 
Hampshire,  New  Jersey,  North  Carolina,  Oklahoma,  and 
Vermont.  Among  the  States  avoiding  this  double  taxation 
of  inheritances  are:  Arkansas,  Connecticut,  Idaho,  Ken- 
tucky, Louisiana,  Maryland,  Massachusetts,  Minnesota, 
Missouri,  Montana,  Nebraska,  New  York,  North  Dakota, 
Oregon,  Pennsylvania,  South  Dakota,  Tennessee,  Texas, 
Utah,  Virginia,. Washington,  West  Virginia,  and  Wyoming. 


CHAPTER   VII 

ARE   CORPORATIONS   TAXED   TOO   LITTLE? 

Though  a  few  years  ago  people  somewhat 
more  commonly  believed  than  they  do  now  that 
corporations  do  not  pay  their  proper  share  of 
the  taxes,  the  belief  is  still  prevalent.  If  the  facts 
afford  any  foundation  for  this  feeling,  they  do  so 
on  account  of  assessments  and  not  on  account  of 
the  taxes  provided.  So  far  as  assessments  may 
have  been  defective,  the  fault  has  been  due  to  the 
lack  of  expert  knowledge  on  the  part  of  assessors 
who  have  not  known  how  to  value  the  special 
forms  of  property  owned  by  corporations.  The 
briefest  consideration  will  show  that  the  various 
special  taxes  commonly  devised  for  corporations, 
in  addition  to  those  the  general  laws  impose  on 
them  in  direct  and  indirect  ways,  frequently  pro- 
vide for  an  overtaxation  of  the  corporate  form 
of  doing  business  as  compared  with  individuals 
directly  owning  property  and  conducting  affairs. 
We  have  already  considered  the  matter  of  assess- 
ments. The  remedy  for  any  failure  of  equality 
on  their  account  appears  to  lie  in  centralizing 
their  administration.  This  could  provide  the 
necessary  experts  to  make  the  proper  valuations. 
Let  us  consider  now  the  taxation  itself. 


114      PRINCIPLES   OF  TAXATION 

We  have  already  seen  how  the  taxation  of 
corporate  securities  thrusts  back  an  extra  burden 
of  taxation  on  the  corporate  form  of  enterprise. 
It  is  due  to  several  things  that  the  corporate 
form  of  doing  business  has  not  suffered  more  on 
account  of  this  extra  burden.  So  far  as  the  taxa- 
tion of  borrowing  is  concerned,  it  is  not  peculiar 
to  corporations.  Individual  as  well  as  corporate 
borrowers  suffer  on  account  of  it.  But  we  have 
seen  that  a  considerable  number  of  jurisdictions 
tax  the  stock  of  corporations  and  add  to  corporate 
business  the  burden  of  this  taxation  which  indi- 
vidual business  does  not  have  to  bear.  The  fact 
that  this  tax,  if  equal  to  the  tax  on  tangible 
property,  is  commonly  evaded,  of  course,  relieves 
the  corporate  burden  so  much.  In  just  the  same 
way  the  fact  that  mortgagees  and  bondholders 
commonly  evade  any  high  rate  of  taxation  tends 
by  so  much  to  keep  down  the  rate  of  interest 
charged,  and  to  that  extent  to  relieve  the  indi- 
vidual and  the  corporate  borrower.  This  evasion 
of  taxes  has  enabled  the  corporate  borrower  to 
procure  loans  at  rates  that  would  be  impossible 
if  the  tax  against  the  loans  were  collected.  If  the 
corporation  has  had  sufficient  security  to  offer, 
and  has  been  able  to  give  its  bonds  general  cur- 
rency, it  has  been  able  in  times  of  low  money 
rates  to  borrow  at  less  than  four  per  cent.  If 
lenders  paid  taxes  at  the  average  rate,  approach- 


TAX.\TION   OF   CORPORATIONS    115 

ing  two  per  cent,  they  would  not  have  loaned  at 
a  rate  to  net  them  two  per  cent  or  less.  In  the 
same  way  funds  have  more  readily  gone  into  cor- 
porate enterprises  by  the  purchase  of  stock 
because  the  purchasers  in  those  jurisdictions 
which  impose  a  tax  on  stock  had  no  intention  of 
having  their  expected  net  return  from  the  invest- 
ment reduced  by  the  amount  of  the  tax. 

Another  reason  why  the  corporate  form  has 
not  suffered  more  lies  in  the  fact  that  a  given 
kind  of  business  has  largely  either  remained  in 
individual  hands  or  has  assumed  the  corporate 
form.  This  development  has  largely  come  from 
the  advantage  of  conducting  certain  businesses 
on  a  larger  scale  than  individual  ownership  gen- 
erally permits.  So  a  corporation  has  not  been 
competing  with  individuals,  but  with  other  cor- 
porations subject  to  the  same  tax  burden.  Then 
there  is  always  the  fact  that  taxation  is  only  one 
among  many  economic  forces  at  work  in  private 
enterprise,  and  it  may  not  be  possible  to  trace 
its  effect  in  the  resultant  of  them  all. 

The  corporation  meets  extra  tax  burdens  from 
its  very  beginning.  At  its  organization  it  must  in 
most  jurisdictions  pay  a  tax  on  its  stock  in 
addition  to  the  charge  (generally  in  itself  a  tax) 
for  incorporation.  Many  jurisdictions  levy  an 
annual  capital  stock  tax.  Though  this  is  usually 
not  large  in  itself,  considering  the  fact  that  it  is 


ii6       PRINCIPLES   OF  TAXATION 

superimposed  on  a  full  taxation  on  account  of 
property  owned,  it  amounts  to  a  considerable 
exaction/ 

Besides  those  States  having  a  capital  stock 
tax  of  the  kind  just  mentioned,  several  jurisdic- 
tions have  a  tax  on  the  so-called  "corporate 
excess"  by  which  they  aim  to  reach  intangible 
values  expressed  in  the  market  value  of  the  stock. 
In  general  the  "corporate  excess"  is  taken  to  be 
the  assessed  value  of  all  the  corporate  securities 
less  the  assessed  value  of  the  tangible  property 
of  the  corporation.  To  show  the  situation  con- 
cretely, suppose  a  corporation  with  $1,000,000 
of  bonds  selling  at  par  and  $1,000,000  of  capital 
stock  selling  at  125.  Assume  that  the  tangible 
property  of  the  corporation  is  assessed  where  it  is 

^  In  Ohio,  for  example,  the  state  capital  stock  tax  levied 
on  all  corporations  except  public  service  corporations,  is 
three  twentieths  of  one  per  cent,  that  is,  .15  per  cent,  on  the 
par  value  of  the  stock.  If  the  general  property  tax  amounts 
to  1.50  per  cent,  this  would  make  the  tax  on  corporations 
amount  to  1.65  per  cent  as  compared  with  a  tax  of  1.50  per 
cent  on  individuals,  assuming  that  the  par  of  the  stock  just 
represented  the  value  of  the  corporate  property.  New  York 
has  a  tax  on  capital  stock  which  it  calls  a  franchise  tax. 
Domestic  and  foreign  corporations  pay  to  this  State  a  tax 
computed  on  the  amount  of  capital  stock  employed  in  the 
jurisdiction.  It  depends  on  the  amount  of  dividends.  Cor- 
porations paying  dividends  of  6  per  cent  or  more  pay  a  tax 
of  one  fourth  mill  for  each  one  per  cent  of  dividends.  Spe- 
cial provisions  are  made  for  those  paying  dividends  of  less 
than  6  per  cent. 


TAXATION   OF   CORPORATIONS    117 

located  at  $2,000,000.  The  securities  of  the 
corporation  are  worth  $2,125,000.  The  State 
calls  the  $125,000  the  corporate  excess  and  taxes 
it  substantially. 

We  have  two  possibilities  here.  The  tangible 
property  in  the  locality  where  the  corporate 
property  lies  may  not  be  assessed  at  its  full  value. 
In  that  event  the  market  value  of  the  securities 
expressed  the  full  value  of  the  tangible  property 
of  the  corporation.  But  in  this  case  property 
individually  owned  pays  taxes  only  on  the 
assessed  valuation,  which  is  less  than  the  actual 
value,  and  the  corporation  is  paying  taxes  on  the 
full  actual  value  of  its  property.  It  would  be  as 
fair  to  say,  "We  will  assess  individually  owned 
property  at  .66  per  cent  of  its  actual  value,  but 
will  assess  corporately  owned  property  at  lOO 
per  cent  of  actual  value." 

The  State  professes  to  act  on  the  other  possi- 
bility in  levying  the  tax.  It  is  that  there  are  cer- 
tain "  intangible  "  values  in  the  corporation  which 
a  taxation  of  its  tangible  property  does  not  reach. 
There  are  no  such  values,  however,  which  may 
not  equally  be  present  in  individually  conducted 
enterprises.  The  value  of  the  securities  in  excess 
of  the  value  of  the  tangible  property  comes  from 
special  skill  in  management  or  from  good-will. 
The  State  does  not  seek  these  out  and  tax  them 
in  the  case  of  individuals.   Of  course,  both  these 


ii8       PRINCIPLES   OF  TAXATION 

possibilities  may  be  present  in  the  "excess"  of  a 
corporation.  It  may  represent  partly  the  differ- 
ence between  assessed  value  and  actual  value  of 
tangible  property,  and  partly  intangible  values 
of  skill  in  management  and  good -will/ 

Is  there  sufficient  reason  for  this  extra  taxation 
of  corporations?  Taxes  levied  go  way  beyond 
the  cost  of  the  corporate  form  to  the  States.  It 
increases  ability  to  pay,  if  at  all,  only  in  indirect 
ways,  as  in  enabling  capital  to  be  massed  for  the 
undertaking  of  enterprises  so  large  as  not  gener- 
ally to  be  possible  for  individuals.  Let  us  apply 
the  benefit  theory  of  taxation  to  see  if  we  can  on 
any  theory  find  a  justification  for  this  special 
taxation  of  corporations.   Does  the  State  bestow 

1  States  employing  the  method  of  corporate  excess  in 
taxing  corporations  are  Massachusetts,  Connecticut,  In- 
diana, Illinois.  In  Massachusetts  the  assessed  value  of  the 
tangible  property  is  deducted  from  the  market  value  of  the 
stock  only.  Bonds  are  not  included  in  the  securities  valua- 
tion. In  the  other  States  bonds  are  included  with  the  stock 
in  arriving  at  the  corporate  excess.  Massachusetts  and 
Connecticut  take  the  market  value  of  the  securities  in  ar- 
riving at  corporate  excess.  Indiana  and  Illinois  leave  the 
valuation  of  the  securities  to  the  judgment  of  the  Tax  Com- 
missioner. Connecticut  applies  this  tax  only  to  railroads; 
Indiana  to  practically  all  corporations  except  railroads; 
Illinois  applies  it  to  domestic  corporations;  Massachusetts 
to  domestic  and  foreign  corporations.  Other  States,  Minne- 
sota, North  Dakota,  South  Dakota,  and  Kansas,  have  this 
tax  on  their  statute  books,  but  apparently  do  not  enforce  it. 

New  York  and  Massachusetts  also  have  a  stock  transfer 
tax. 


TAXATION   OF   CORPORATIONS    119 

any  such  special  benefit  on  those  who  seek  the 
corporate  form  that  it  is  justified  in  taxing  them 
on  account  of  it?  Limited  HabiHty  is  the  most 
important  gift  of  the  State  to  a  corporation.  This 
especially  helps  in  that  massing  of  capital  we  have 
just  spoken  of.  It  is  important  to  the  State  that 
enterprises  requiring  large  amounts  of  capital 
should  be  undertaken.  That  might  sufficiently 
offset  whatever  special  privilege  is  given  to  the 
individuals  forming  the  corporation.  Limited 
liability  really  imposes  no  disadvantage  on  people 
in  general.  If  they  deal  with  a  corporation,  they 
realize  the  limited  liability  and  make  terms 
accordingly.  Perpetuity  and  other  characteristics 
of  a  corporation  are  merely  characteristics  of  a 
business  device,  and  do  not  afford  any  better 
reason  for  taxation  than  the  characteristics  of 
any  other  business  device,  such  as  a  bill  of  lading 
which  has  proved  greatly  useful  in  business  prac- 
tice and  therefore  may  be  said  to  confer  a  benefit 
on  the  user.  Doubtless  if  the  State  should  tax 
the  use  of  a  bill  of  lading,  shippers  would  con- 
tinue to  use  it  and  endure  the  burden  because  of 
the  convenience  of  the  device.  Such  taxation, 
however,  depends  on  the  idea  of  what  the  traffic 
will  bear  and  has  no  relation  to  any  fair  princi- 
ples of  taxation. 


CHAPTER   VIII 

SINGLE  TAX,  THE  INCREMENT  TAX,  AND 
LOCAL    OPTION    IN   TAXATION 

It  is  no  part  of  our  general  purpose  to  discuss 
special  tax  proposals,  particularly  those  with  a 
primary  purpose  other  than  raising  revenue. 
Advocates  of  the  "  Single  Tax  "so  actively  agitate 
for  it,  however,  that  it  seems  desirable  to  give  it 
a  brief  consideration.  They  present  a  plan  of 
taxation  which  provides  for  a  tax  on  land  only. 
It  would  exclude  from  taxation  that  realty  which 
consists  of  improvements  on  land  and  all  per- 
sonalty. The  proposal  is  founded  on  the  assump- 
tion that  the  existence  of  the  community  creates 
land  values,  and  that,  therefore,  the  community 
has  a  special  right  to  appropriate  those  values  to 
its  general  use.  Its  advocates  further  base  on  this 
assumption  a  program  of  social  reform.  They 
declare  that  placing  the  entire  burden  of  taxation 
on  land  would  "force  it  into  use."  That  is,  on 
account  of  the  heavy  tax  charges,  presumably  a 
landowner  would  not  be  able  to  hold  his  land  as 
a  speculation  only.  In  order  to  meet  the  heavier 
tax  charges  he  would  be  obliged  to  "  improve  "  it, 
as  the  word  is ;  that  is,  to  build  on  it  or  otherwise 


THE   SINGLE  TAX  121 

use  it  in  such  a  way  as  to  derive  a  present  revenue 
from  it,  or  immediately  to  sell  it  to  some  one 
who  would  improve  or  make  use  of  it.  Land,  the 
single  tax  people  say,  is  the  only  natural  monop- 
oly, the  only  factor  of  the  economic  trilogy  of 
land,  labor,  and  capital  which  is  limited  in  supply. 
If  no  one  is  able  to  take  undue  personal  advantage 
of  this  natural  monopoly,  if  it  is  forced  into  use, 
every  one  will  have  an  equal  economic  opportun- 
ity. Those  who  advocate  this  policy  are  so  high- 
minded  and  earnest  in  their  aims,  and  work  so 
vigorously  to  attain  them,  as  to  create  a  predispo- 
sition in  favor  of  their  argument. 

We  cannot  grant  all  their  premises.  To  say 
that  land  derives  its  value  from  the  existence  of 
the  community  is  to  say  that  it  is  valuable 
because  people  want  it.  Is  it  in  that  respect  any 
different  from  grain,  cattle,  and  other  things 
which  have  value  because  people  want  them? 
If  it  is  objected  that  the  community  gives  special 
values  to  land,  that  an  acre  in  New  York  City 
has  a  vastly  different  value  from  an  acre  of 
Texas  range  land,  it  is  also  true  that  a  beef  car- 
cass is  more  valuable  in  New  York  City  than  on 
the  Texas  range. 

The  truth  is  that  the  community  has  chosen  to 
establish  private  property  in  land,  as  well  as  in 
other  forms  of  wealth,  as  a  matter  of  social  utility. 
It  has  become  "capitalized."    The  attitude  of 


122      PRINCIPLES   OF  TAXATION 

the  individual  owner  toward  it  is  the  same  as  his 
attitude  toward  any  other  wealth.  Just  like  any 
wealth  capable  of  use  in  production,  it  has  become 
capital.  As  such,  the  relationship  it  lies  in,  as 
between  the  individual  and  the  community,  is 
the  same  as  that  of  any  other  form  of  wealth. 

So  long  as  there  is  any  unoccupied  land,  or  any 
land  capable  of  greater  use  in  production  than  it 
now  has,  it  is  not  true  that  land  is  the  limited 
and  labor  and  capital  are  the  unlimited  elements 
of  production.  Though  there  is,  for  example, 
abundant  fertile  land  in  the  West,  capable  of 
great  productivity  under  irrigation,  we  lack 
capital  to  irrigate  and  labor  to  work  it.  The  appli- 
cation of  nitrogen  would  make  fertile  many  acres 
of  land  that  are  now  barren.  The  use  of  capital 
in  the  process  would  extract  nitrogen  from  the 
air.  We  have  not  the  available  capital  to  do  it. 

Whatever  effect  of  forcing  land  into  use  the 
single  tax  might  have,  it  would  not  go  very  far  in 
affording  that  equality  of  opportunity  its  advo- 
cates claim  for  it.  Land  is  of  only  the  slightest 
use  without  capital.  If  the  land  were  forced  into 
use  and  made  somewhat  more  available,  no  cap- 
ital would  be  immediately  available  to  make  use 
of  the  land.  Applying  labor  to  land  without 
capital  would  produce  only  a  slow  growth  of 
additional  capital. 

Advocates  of  the  single  tax  assume  that  hold- 


THE  SINGLE  TAX  123 

ing  land  out  of  use  brings  only  evil  to  the  com- 
munity, or  at  least  more  evil  than  good.  This 
may  well  be  questioned.  May  the  community  not 
gain  very  distinctly  from  having  some  of  its  land 
held  out  of  use?  In  a  given  community  may  it 
not  be  desirable  that  some  of  its  land  remain  for  a 
time  entirely  unimproved  rather  than  having  one 
building  put  up  which  will  shortly  have  to  be 
destroyed  and  replaced  with  a  larger  building  to 
keep  pace  with  the  growth  of  the  community? 
Holding  some  of  the  land  out  of  use  may  well  lead 
to  a  conservation  of  capital.  It  would  seem  that 
speculation  in  land  has  the  same  advantages  to 
the  community  in  conserving  and  giving  a  proper 
distribution  to  the  land  supply  as  speculation  in 
commodities  in  conserving  and  giving  a  proper 
distribution  to  the  supply  of  food  and  clothing. 
Speculative  opportunity,  a  rapid  advance  in  land 
values,  would  overcome  the  tendency  of  a  tax  to 
force  land  into  use.  If  an  owner  anticipated  an 
advance  of  50  or  100  per  cent,  a  tax  of  5  or  10 
per  cent  might  not  be  a  sufficient  influence  to 
overcome  speculation  and  compel  improvement. 
In  an  urban  community  the  matter  of  land 
supply  is  one  of  mere  space,  earth  surface.  Out- 
side of  an  urban  community  land  supply  means 
rather  the  content  of  the  land  —  what  is  in  it  or 
on  it  —  than  the  matter  of  space.  One  acre  that 
has  the  chemical  constituents  in  its  soil  to  pro- 


124       PRINCIPLES   OF  TAXATION 

duce  thirty  bushels  of  wheat  is  worth  more  than 
two  acres  that  will  produce  fifteen  bushels  of 
wheat  each.  Timberland  is  valuable  on  account 
of  the  timber  on  it,  not  because  of  being  a  certain 
area  on  the  surface  of  the  earth.  Speculating  in 
these  lands  is  speculation  in  potential  commodi- 
ties and  is  conserving  them  against  the  needs  of 
an  increasing  population.  To  force  such  lands 
into  use,  in  so  far  as  the  capital  supply  permits 
their  use,  would  be  to  encourage  the  increase  of 
population  by  an  immediate  cheapening  of  prod- 
uce and  make  the  famine  that  is  to  come  more 
acute  because  there  will  be  less  available  "land" 
and  a  greater  population.  . 

Since  land  has  in  fact  become  capitalized,  it 
seems  unfair  for  the  community  to  single  out  the 
owners  of  that  particular  form  of  wealth  for  con- 
tribution to  supply  community  needs.  This  is 
especially  the  case  in  view  of  the  operation  of 
economic  principles  which  tend  immediately  to 
deduct  from  the  market  value  of  the  property  on 
which  it  is  levied  so  much  of  the  capitalized  value 
of  a  tax  expected  to  be  permanent  as  cannot  be 
shifted.  This  has  been  a  fact  of  experience  too 
often  to  be  doubted.  To  levy  the  entire  com- 
munity burden  on  this  form  of  wealth  would  be 
either  to  take  immediately  large  values  from  one 
class  in  the  community,  that  now  owning  land, 
and  bestow  equivalent  values  on  another  class, 


INCREMENT  TAX  125 

those  owning  other  property  now  taxable,  or  to 
shift  an  extra  burden  of  taxation  over  on  tenants 
or  purchasers  of  land  products.  Very  likely  the 
total  effect  would  be  taken  out  in  both  ways.  It 
is  impossible  to  foretell  just  what  would  happen 
until  the  event. 

Denying  a  right  to  enjoy  an  increase  in  land 
values  because  it  is  "unearned,"  the  "unearned 
increment,"  as  it  is  called,  ignores  the  element  of 
risk.  One  earns  something  by  being  an  insurer 
for  the  community.  "Where  were  my  ancestors," 
asks  Artemas  Ward,  or  some  other  profound 
jester,  "when  Manhattan  was  going  for  $19?"  — 
or  whatever  the  historic  price  was.  Whosoever's 
ancestors,  aside  from  those  making  the  purchase, 
were  on  the  island  at  the  time  did  not  care  to  take 
the  risk.  They  preferred  using  their  $19,  or  any 
other  number  of  dollars,  in  trading  in  skins  to  in- 
vesting it  in  Manhattan  real  estate.  Those  who 
speak  of  the  "unearned  increment"  speak  as  if 
there  were  always  an  increment,  and  never  a 
"decrement,"  if  I  may  coin  a  word.  Following 
the  thought  of  "Where  are  the  snows  of  yester- 
day?" one  may  ask,  "Where  are  the  descendants 
of  the  Astors  of  ancient  Troy  or  of  Babylon  or  of 
the  wealthy  seaport  of  Tyre?"  Any  landlord  in 
certain  sections  of  Manhattan  could  testify  that 
one  need  not  go  so  far  back  in  history  to  find 
examples  of  shifting  realty  values. 


126       PRINCIPLES   OF  TAXATION 

This  idea  of  the  unearned  increment  leads 
directly  to  a  consideration  of  another  tax  pro- 
posal already  being  tried  in  Europe,  —  the 
increment  tax.  Like  the  single  tax,  this  appar- 
ently rests  on  the  thought  that  an  increase  in  land 
values  is  a  gift  of  the  comrhunity,  and  therefore 
especially  subject  to  appropriation  for  the  uses  of 
the  community.  This  proposal  would  levy  a  tax 
on  increases  in  land  values.  Should  not  such  a 
proposal  carry  as  a  corollary  some  reimburse- 
ment by  the  community  for  a  decline  in  land 
values?  Suppose  a  piece  of  land  increases  in 
value  from  $io,ooo  to  $15,000 and  is  taxed  on  the 
$5000  increase,  then  declines  to  a  value  of  $10,000. 
The  owner  is  no  better  off  than  he  would  have 
been  if  the  property  had  never  increased  in  value. 
He  is  "out"  the  "increment"  tax  he  paid. 

Why  confine  the  taxing  of  increments  to  incre- 
ments in  the  value  of  land?  If  a  man  buys  cotton 
in  the  fall  at  one  price  and  in  the  spring  it  is 
worth  a  higher  price,  why  not  tax  him  especially 
on  the  increment?  An  income  tax  which  taxes  as 
income  all  such  profits  when  taken  is  fairer  taxa- 
tion than  to  confine  the  taxation  of  profit  to  the 
increment  of  land. 

In  the  case  of  a  city  about  to  make  some  local 
improvement  requiring  the  acquisition  of  land, 
as  the  cutting  through  of  a  new  street,  or  the  raz- 
ing of  a  block  of  buildings  to  create  a  park,  there 


LOCAL   OPTION    IN   TAXATION    127 

does  not  arise  in  my  mind  any  objection  to  giving 
the  city  the  right  to  acquire,  by  eminent  domain, 
if  necessar>-,  property  adjacent  to  that  actually 
required  for  the  street,  or  park,  or  whatever,  in 
order  that  the  community  may  get  the  benefit  of 
the  increase  in  values  resulting  from  its  special 
expenditure.^  Indeed,  it  seems  to  me  that  this 
should  be  done.  It  rests  on  a  different  principle 
from  the  single  tax,  for  here  is  a  definite  ex- 
penditure of  community  money  creating  a  specific 
benefit  to  particular  property.  Since  the  prop- 
erty is  taken  at  a  definite  existing  value,  the 
appropriation  differs  from  an  increment  tax 
on  property  from  which  the  increment  may 
disappear. 

We  will  mention  one  more  tax  proposal  which 
perhaps  is  not  out  of  place  when  connected  with  a 
mentioning  of  the  single  tax  and  the  increment 
tax,  because  it  seems  especially,  though  not  exclu- 
sively, to  be  pressed  by  advocates  of  the  single 
tax,  on  6ne  application  of  the  principle  of  divide 
et  impera.  This  is  the  proposal  for  local  option  in 
taxation.  Since  so  many  of  our  tax  ills  come  from 
the  amount  of  local  option  already  existing  on 
account  of  the  multiplicity  of  jurisdictions  having 
authority  in  taxation,  it  seems  rather  mal  a  propos 
to  propose   an  overwhelming  extension   of  the 

1  This  is  already  the  European  practice,  and  is  authorized 
in  New  York  State  at  least. 


128       PRINCIPLES   OF  TAXATION 

number  of  communities  with  power  to  say  what 
shall  be  taxed.  Even  though  the  power  should  be 
strictly  limited,  it  would  bring  great  further  con- 
fusion into  taxation  matters.  So  far  as  the  single- 
tax  people  are  back  of  this  movement,  their  idea 
seems  to  be  that  by  concentrating  their  efforts  on 
a  single  community  they  are  likely  to  get  a  trial 
of  their  plan  sooner  than  they  can  if  they  have 
to  persuade  a  whole  State.  With  our  constantly 
increasing  economic  unity  there  is  less  need  for 
local  diversity  in  taxation  and  it  would  create 
greater  confusion.  Rather  than  grant  more  local 
option  leading  to  a  greater  diversity  in  taxation, 
we  need  to  work  for  such  uniformity  in  taxation 
as  will  make  for  justice. 


INDEX 


Ability,  levying  tax  with  relation 
to,  13;  and  cost,  either  alone  in- 
adequate as  taxation  basis,  15; 
market  price  of  property  fairest 
index  of  ability  to  pay  on  account 
of  property,  19;  would  require 
greater  progression  in  taxation 
than  ever  suggested,  22;  to  pay, 
vagueness  of  term,  23;  theorj'  of, 
rests  on  doctrine  of  altruism,  29; 
due  to  more  skillful  management 
should  all  be  reached  alike,  48; 
increases  more  rapidly  than  in- 
come, 24;  where  taxes  should  be 
paid,  70. 

Alabama,  taxation  of  mortgages 
in,  74- 

Allocation  of  cost,  may  be  desira- 
ble to  have  some  members  of 
community  enjoy  benefit  with- 
out paying  cost,  10:  possible  dif- 
ficulty of,  10;  possible  difficulty 
of  collection,  10. 

Arizona,  mortgage  taxation,  76; 
stock  taxation,  79;  bond  taxa- 
tion, 82. 

Arkansas,  mortgage  taxation,  76; 
stock  taxation,  79;  bond  taxa- 
tion, 82. 

Assessment,  90;  central  adminis- 
tration of,  92;  at  full  value,  93; 
of  mortgages,  why  it  can  be  at 
par,  94;  of  securities  at  market 
value,  94;  of  railroad  properties 
in  various  jurisdictions,  method 
of,  104;  of  railroads  by  value  of 
securities,  106 

Assessors,  locally  elected,  weak- 
ness of,  90. 

Authors,  American,  on  taxation, 
14. 

Automobiles,  si- 


Benefit,  as  basis  of  taxation  raises 
philosophical  problem,  14. 

Boards  of  equalization,  90. 

Bonds,  taxation  of,  82. 

Borrowing,  gains  from,  represent 
risk,  46. 

Borrowing  and  lending  commun- 
ities, 66. 

California,  mortgage  taxation,  74; 
stock  taxation,  76;  bond  taxa- 
tion, 82. 

Capital  commands  uniform  return, 
37. 

Capital  investment,  tendency  of 
community  to  overlook  where 
making  price  for  service,  6. 

Capital  stock  tax,  115. 

Central  administration  of  assess- 
ment, 90. 

Communities  within  the  State,  con- 
flict of  interest  among,  78. 

Community  of  location  of  wealth, 
what  taxes  should  be  paid  in,  69. 

Community  of  residence,  what 
taxes  should  be  paid  in,  69. 

Connecticut,  taxation  of  mort- 
gages, 74;  taxation  of  stock,  76; 
taxation  of  bonds,  82;  distri- 
bution of  railroad  taxes,  loi; 
method  of  assessing  railroads, 
105;  corporate  excess  tax,  118. 

Corporate  excess  tax,  116;  juris- 
dictions applying,  n8. 

Corporate  taxation,  extra,  lis. 

Corporations,  are  they  taxed  too 
little,  113. 

Cost,  and  ability,  either  alone  in- 
adequate as  taxation  basis,  15. 

Cost  of  service,  levying  tax  accord- 
ing to,  13;  applied  in  making 
prices,  fees  and  special  assess- 


I30 


INDEX 


ments,  21;  extending  to  taxation, 
22;  where  taxes  should  be  paid 
for,  69. 

Cost  to  government,  special,  im- 
ixjsed  by  property,  26. 

Credits,  taxing  them  taxes  a 
method  of  doing  business,  36; 
incidence  of  taxation  of,  falls 
on  the  debtor,  39;  effect  of  lend- 
ing community  not  taxing,  67. 

Debt,  does  not  produce  ability  to 
pay,  35 ;  taxing  it  taxes  a  method 
of  doing  business,  36. 

Delaware,  does  not  tax  mortgages, 
74;  method  of  assessing  rail- 
roads, 105. 

Direct  and  indirect  owners  of 
wealth,  different  treatment  of, 
62 ;  direct  owner  cannot  shift  in- 
cidence of  tax,  64. 

Distribution  of  railroad  taxes  in 
various  jurisdictions,  loi. 

Double  purpose  in  taxation  con- 
fusing, 56. 

Economic  activity  of  community 
may  be  public  or  private,  2. 

Equality  of  sacrifice,  what  is,  24. 

Equalization,  boards  of,  90. 

Expert  knowledge  in  assessment, 
92. 

Fee,  and  price, distinction  between, 
8;  meets  the  cost  of  some  public 
services,  8;  of  courts,  in  the  na- 
ture of  a  penalty,  9 ;  in  excess  of 
cost,  a  tax,  9. 

Fire  protection,  cost  of,  not  accord- 
ing to  value  of  property,  28. 

Fiscal  policy,  what  constitutes,  55. 

Florida,  mortgage  taxation,  76; 
stock  taxation,  79;  bond  taxa- 
tion, 82. 

Full  value  in  assessment,  93- 

Georgia,  mortgage  taxation,  76; 
stock  taxation,  79;  bond  taxa- 
tion, 83. 


Holding  land  out  of  use,  possible 
gain  from,  123. 

Idaho,  does  not  tax  mortgages,  74. 

Illinois,  mortgage  taxation,  76; 
stock  taxation,  79;  bond  taxa- 
tion, 82;  distribution  of  railroad 
taxes,  102;  method  of  assessing 
railroads,  105;  corporate  excess 
tax,  118. 

Incidence  of  taxation,  of  credits 
falls  on  debtor,  39;  on  corpo- 
rate form  cannot  be  shifted, 
42;  direct  and  indirect  owner, 
64. 

Income,  from  labor,  not  equiva- 
lent to  income  from  property, 
16;  even  from  property,  not  a 
true  test  of  ability,  18;  from 
property,includes  return  for  risk, 
18. 

Income  tax,  problem  of,  15;  in 
Wisconsin,  16;  offsetting  losses 
may  not  compensate  for  taxes 
paid  on  return  for  risk,  18. 

Increment  tax,  126. 

Indiana,  mortgage  taxation,  76; 
stock  taxation,  79;  bond  taxa- 
tion, 82;  method  of  assessing 
railroads,  105;  corporate  excess 
tax,  118. 

Indirect  and  direct  owners  of 
wealth,  different  treatment  of, 
62. 

Indirect  owner  shifts  incidence  of 
tax,  64. 

Inheritance  tax,  108;  against  whom 
levied.  109;  taxing  intangibles 
of  non-residents,  iii;  jurisdic- 
tions levying  on  intangibles  of 
non-residents,  112. 

Intangible  values,  taxation  of,  107. 

Interest  rate,  without  allowance 
for  risk,  is  uniform,  37. 

Iowa,  taxation  of  mortgages  in,  74; 
method  of  assessing  railroads, 
106. 

Kansas,    mortgage   taxation,    76; 


INDEX 


131 


stock  taxation,  79;  bond  taxa- 
tion, 82;  method  of  assessing 
railroads,  106. 
Kentucky,  mortgage  taxation,  76; 
stock  taxation,  79;  bond  taxa- 
tion, 82. 

Labor,  income  from,  not  equiva- 
lent to  income  from  property, 
16. 

Land,  has  become  capitalized,  31; 
held  out  of  use,  possible  gain 
from,  123;  may  be  more  than 
earth  surface,  123;  risk  in  own- 
ing, 125. 

Lending  and  borrowing  commun- 
ities, 66. 

Lending  community,  effect  of  not 
taxing  credits,  67. 

Levying  tax,  according  to  income, 
12;  according  to  value  of  prop- 
erty, 12;  with  relation  to  ability 
to  pay,  13;  with  relation  to  cost 
of  service,  13. 

Local  and  state  taxation,  separa- 
tion of,  96. 

Local  option  in  taxation,  127. 

Locally  elected  assessors,  weak- 
ness of,  90. 

Louisiana,  mortgage  taxation,  75; 
stock  taxation,  79;  bond  taxa- 
tion, 82. 

Maine,  mortgage  taxation,  74; 
stock  taxation,  79;  bond  taxa- 
tion, 82;  corporate  sources  of 
state  revenue,  97 ;  method  of  as- 
sessing railroads,  104. 

Management,  more  skillful,  duo 
to  borrowing,  ability  on  account 
of,  should  be  reached  only  in  the 
same  way  as  any  other  more 
skillful  management,  48. 

Market  price,  allows  for  risk,  19; 
fairest  index  of  ability  to  pay, 
19;  as  basis  of  tax  combines 
theories  of  cost  and  ability,  27; 
in  assessing  securities,  94. 

Maryland,  taxation  of  mortgages 


in,  74;  method  of  assessing  rail- 
roads, 105. 

Massachusetts,  mortgage  taxation, 
7S;  stock  taxation,  79;  bond  tax- 
ation, 82;  method  of  assessing 
railroads,  105;  corporate  excess 
tax,  118;  stock  transfer  tax, 
118. 

Method  of  doing  business,  may 
add  to  productiveness,  36;  illus- 
tration of  taxing,  38. 

Michigan,  taxation  of  mortgages 
in,  74;  method  of  assessing  rail- 
roads, 105. 

Minnesota,  taxation  of  mortgages 
in,  74;  corporate  sources  of  state 
revenue,  99;  method  of  assessing 
railroads,  105. 

Mississippi,  mortgage  taxation, 
76;  stock  taxation,  79;  bond  tax- 
ation, 82. 

Missouri,  mortgage  taxation,  76; 
stock  taxation,  79;  bond  taxa- 
tion, 82;  method  of  assessing 
railroads,  106. 

Montana,  mortgage  taxation.  76; 
stock  taxation,  79;  bond  taxa- 
tion,  82. 

Mortgages,  taxation  of,  in  vari- 
ous jurisdictions,  74;  fair  rate  of 
taxation,  75;  why  they  can  b« 
assessed  at  par,  94. 

Nebraska,  mortgage  taxation,  74; 
stock  taxation.  79;  bond  taxa- 
tion, 82;  method  of  assessing 
railroads,  106. 

Nevada,  mortgage  txxation,  76; 
stock  taxation,  79;  bond  taxa- 
tion, 82. 

New  Hampshire,  mortgage  taxa- 
tion, 75 ;  stock  taxation,  79; 
bond  taxation,  82;  corporate 
sources  of  state  revenue,  98;  dis- 
tribution of  railroad  taxes,  loi; 
method  of  assessing  railroads, 
104. 

New  Jersey,  mortgage  taxation, 
75 ;  stock  taxation,  79;  bond  tax- 


132 


INDEX 


ation,  82;  distribution  of  rail- 
road taxes,  10 1. 

New  Mexico,  mortgage  taxation, 
76;  stock  taxation,  79;  bond  tax- 
ation, 82. 

New  York,  taxation  of  mortgages, 
74;  sources  of  state  revenue,  97; 
method  of  assessing  railroads, 
capital  stock  tax,  ir6;  stock 
transfer  tax,   118. 

North  Carolina,  mortgage  tEixa- 
tion,  76;  stock  taxation,  79; 
bond  taxation,  82. 

North  Dakota,  mortgage  taxation, 
76;  stock  taxation,  79;  bond  tax- 
ation, 82;  method  of  assessing 
railroads,  106. 

Ohio,  mortgage  taxation,  76;  stock 
taxation,  79;  bond  taxation,  82; 
corporate  sources  of  state  rev- 
enue, 98;  method  of  assessing 
railroads,  105;  capital  stock  tax, 
116. 

Oklahoma,  mortgage  taxation,  76; 
stock  taxation,  79;  bond  taxa- 
tion, 82. 

Oregon,  mortgage  taxation,  76; 
stock  taxation,  79;  bond  taxa- 
tion, 82. 

Pennsylvania,  taxation  of  mort- 
gages in,  7s;  method  of  assessing 
railroads,  105. 

Piracy  in  taxation,  65. 

Police  power,  a  public  activity,  3. 

Price  and  fee,  distinction  between, 
8. 

Price  for  service  may  be  charged 
by  public  activity,  5- 

Private  property,  fact  of  commu- 
nity maintenance  of,  a  basis  for 
taxation,  28;  some  public  expen- 
ditures not  on  account  of,  29. 

Production,  taxing,  38. 

Property,  income  from,  not  equi- 
valent to  income  from  labor,  16; 
a  legal  term,  31 ;  and  wealth,  not 
synonymous,  31;  different  forms 


of,  impose  different  costs,  33;  all 
forms  of,  do  not  give  the  same 
ability  to  pay,  34. 

Public  activities,  what  are,  3;  and 
private,  no  clear  line  between,  4; 
and  private,  a  matter  of  en- 
forcible  opinion,  5;  may  charge 
price  for  service,  s;  special  as- 
sessment to  cover  cost  of,  6; 
fees  meet  the  cost  of  some,  8. 

Public  expenditures,  not  on  ac- 
count of  private  property,  to 
be  borne  according  to  ability, 
29. 

Public  income,  not  unlimited,  2. 

Railroad  taxes,  distribution  of,  in 
various  jurisdictions,  loi. 

Rate  of  taxation,  for  railroads,  103; 
for  state-wide  and  interstate 
properties,  104. 

Real  and  tangible  personal  prop- 
erty on  same  basis  in  taxation, 
49. 

Representatives  of  wealth  created 
by  corporate  form,  41. 

Rhode  Island,  taxation  of  mort- 
gages in,  7S;  method  of  assessing 
railroads,  105. 

Risk,  returns  for,  represents  most 
gains  from  borrowing,  46;  in 
land  ownership,  125. 

Securities,  value  of,  in  railroad  as- 
sessment, 106;  taxation  of, 
thrusts  burden  on  corporations, 
114. 

Sewers,  streets,  sidewalks,  paid  for 
by  special  assessments,  6. 

Sidewalks,  streets,  sewers,  paid 
for  by  special  assessments,  6. 

Single  tax,  120. 

Situs  for  taxation,  where  taxes 
should  be  paid,  59. 

Social  ends,  indirect,  should  not  be 
sought  by  taxation,  55- 

Social  expediency,  shifting  opinion 
of,  4. 

Sources  of  state  revenue  in  New 


INDEX 


133 


England,  Middle  Atlantic,  and 
Eastern  Central  States,  99. 

South  Carolina,  mortgage  taxa- 
tion, 76;  stock  taxation,  79; 
bond  taxation,  82. 

South  Dakota,  mortgage  taxation, 
76;  stock  taxation,  79;  bond  tax- 
ation, 82;  method  of  assessing 
railroads,  106. 

Special  assessments  to  cover  cost 
of  public  activity,  6. 

State  and  local  taxation,  separa- 
tion of,  96. 

Stock  of  goods,  SI- 

Stock,  taxation  of,  in  various  juris- 
dictions, 79- 

Streets,  sewers,  sidewalks,  paid  for 
by  special  assessment,  6. 

Tangible  personal  property  and 
real  property  on  same  basis  in 
taxation,  49. 

Tax,  what  it  is,  9.  1 1 ;  a  transfer  of 
wealth  from  private  to  public 
ownership,  12. 

Tennessee,  mortgage  taxation,  76; 
stock  taxation,  79;  bond  taxa- 
tion, 82. 

Texas,    mortgage    taxation,    76; 


stock  taxation,  79;  bond  taxa- 
tion, 82. 
Timberland,  51. 

Unproductive  wealth,  52;  taxing 

of,  is  tax  on  consumption,  39. 
Unsecured  debts,  taxation  of,  83. 
Utah,   does  not  tax  mortgages.  74. 

Vermont,  mortgage  taxation,  76; 
stock  taxation,  79;  bond  taxa- 
tion, 82;  corporate  sources  of 
state  revenue,  98;  method  of 
assessing  railroads,  104. 

Virginia,  taxation  of  mortgages  in, 
76;  of  stock,  79;  of  bonds,  82. 

Washington,  does  not  tax  mort- 
gages, 74. 

Wealth,  an  economic  term,  31;  and 
property,  not  synonymous,  31; 
in  one  community,  owner  in 
another,  59. 

Wealth  not  used  in  production, 
problem  of,  52- 

Wisconsin,  income  tax,  16;  taxa- 
tion of  mortgages  in,  75;  rate  of 
taxation  for  railroads,  103;  me- 
thod of  assessing  railroads,  los- 


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Principles 


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